8 Smart Strategies for Stretching Your Social Security Income, According to a Financial Planner
Financial planner Kevin Coffey of Complete Spectrum Financial Services in Westminster, Colorado, offers some strategies to help your monthly Social Security payment meet your needs in the years ahead.
Wait as long as you can to collect
While most people can start receiving their monthly Social Security benefit at age 62, it’s often smarter to wait, financial planner Kevin Coffey advises. Why? “If you wait until you’re 70, your monthly Social Security payment grows at 8 percent a year,” he says. “The longer you can delay it, the better, if you’re in good health and don’t need the money.” To cover everyday expenses, tap other retirement funds such as your 401(k), pension fund, annuities, or IRA accounts, or keep working and contributing to savings as long as you can. Here’s an easy strategy to build a $40,000 nest egg.
Use free Social Security tools to plan
First, make sure you have a good advice—use this checklist when picking a financial planner. Then give the Social Security Administration easy-to-use retirement benefit calculator a shot: It uses your current annual income and past earnings to estimate what your monthly check will be. Everyone should also set up an online “My Social Security” account to access your annual statement, or request one by mail to verify that each year’s reported earnings are correct. Social Security is not a one-size-fits-all program, Coffey says: “The timing of your benefits, and which spouse files first, can make a difference of thousands of dollars.” Financial planners and investment firms may offer more detailed calculators that take all your retirement assets into account, and list all the possible options, to help you decide.
Invest one spouse’s Social Security earnings
If both spouses worked, both are entitled to collect Social Security on retirement. “Keep in mind that when one of you dies, the lower of those Social Security payments will go away,” Coffey says. That sudden decrease in monthly income after losing your spouse or partner can be devastating. If you can budget to live on one Social Security check, and invest the other in a money-market fund or guaranteed level-premium term life insurance policy, you can make up for the missing monthly payment. Level term life policies guarantee that your premium payment won’t increase for a set period of time (10 to 30 years, or until you reach a specific age) and pay an income-tax-free death benefit. It’s a safe and affordable way to provide a lump sum to the surviving spouse or partner, Coffey says. Here are some other things a financial planner wants you to know about saving and investing.
Pay down the principal on your mortgage
If you have mortgage debt as retirement approaches, extra principal payments can be the smartest move to cut years off your mortgage term and save thousands in interest. Rather than spring for a refinance, which carries closing costs and fees, send a few extra dollars with each monthly payment, which your loan servicer will automatically apply to principal. Or set aside part of any windfall—like a bonus check or income-tax refund—for a lump-sum principal payment on your home loan. Just make sure your loan doesn’t carry a prepayment penalty. Thinking of selling your house instead? Here’s what you need to know before putting your house on the market.
Pick the Medicare supplement that’s best for you
Everyone is eligible for Medicare when they turn 65. Supplemental coverage, sometimes called “Medigap insurance,” can help with co-payments, deductibles, and other expenses not covered by Original Medicare. Medicare Advantage programs are plans in which a private insurer covers all your Medicare Part A and Part B benefits and usually prescription drugs. Your personal health circumstances will help you decide which policy is best for you. If you’re healthy, a less comprehensive health insurance policy can keep your monthly premium low, but if you have a chronic condition, take expensive meds, or expect to have surgery, paying a higher premium for better coverage will save you thousands. Health networks like HMOs and PPOs can cost less, but visit the plan’s website before you sign up, to view their list of approved drugs and providers. Medicare.gov has the details on how to choose Medigap or Medicare Advantage programs.
Move to a less expensive area
Paying for a move before retirement may pay off in the long run. If your current home is in a pricey coastal city—Boston, San Francisco, Washington, D.C., Los Angeles—you can put your equity to work for you and stretch your Social Security checks and other retirement funds by choosing to live in a less expensive region. Cut your expenses even more by settling in a state where you’ll pay no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming. Take a look at the best places in America to retire.
Provide for grandkids or favorite charities
If you’ve planned well enough to meet your financial needs in retirement, put your money to work for people or causes that you love. Once you turn 70 1/2, the IRS makes you take Required Minimum Distributions (RMDs) from your IRA, 401(k), or other defined contribution plan. Why? So they can collect the taxes that were deferred when you paid into the plans—and there’s a big penalty on top of the taxes due if you don’t comply. Dodge that tax bullet by opening a tax-advantaged 529 college savings plan for a grandchild, or donating the RMD amount to your local animal rescue group, symphony, or any tax-exempt nonprofit that is important to you.
Trim the fat from your budget
Now’s the time to take a good look at all your expenses, especially the ones that have been going along on autopilot. Get updated quotes on your auto or home insurance; what was once a good insurance deal may now be costing way too much. Maybe you don’t need two cars anymore. Is it time to sell your second home—or sell your primary residence and downsize into your second home? Do you really watch all those cable channels? Set up an inexpensive streaming service like Netflix or Amazon Prime, or better yet, borrow DVDs from your public library. Check your credit-card statements for sneaky auto-payments on club memberships you don’t use, subscriptions you no longer read, or donations to organizations that can get along without you. While you’re at it, cancel the cards that charge an annual fee. (Here are four really bad credit cards.)