The Social Security program offers a retirement benefit to workers and their spouses. You can start receiving benefits as early as age 62, which would be considered early retirement, or wait until you reach the full retirement age of 65 to 67 (depending on your year of birth). The benefits you receive are based on the income you earned over the course of your working life, and are subject to a maximum amount.
What you may not realize, however, is that Social Security was not originally designed to be a retirees sole source of support. For most people, Social Security provides only a base level of income. The maximum benefit for a person who retires in 2017 at full retirement age is $2,687 per month. Therefore, it is important to plan for retirement by preparing to supplement Social Security.
Here are some important savings strategies that may help you reach your retirement funding goals.
Participate in your employers retirement plan. Regular contributions to an employer-sponsored retirement plan, such as a 401(k), can be an essential part of your retirement savings program. Contributions to such plans offer three key benefits: they are made with pretax dollars; they reduce your current taxable income; and they have the potential for tax-deferred accumulation. Generally, these plans allow you to set aside a percentage of income each year, up to a maximum amount.
Open a traditional Individual Retirement Account (IRA). Contributions to a traditional IRA may be tax deductible, depending on your participation in an employer-sponsored retirement plan, your adjusted gross income (AGI), and your tax filing status. Potential earnings accumulate on a tax-deferred basis. For tax year 2017, you can contribute up to $5,500 (or $6,500 for individuals age 50 or older). Contributions are limited to the amount of earned income and the owner must be under age 70 at the end of the year. If funds are distributed prior to age 59, a 10% Federal income tax penalty may apply, unless certain qualified exceptions apply.
Consider a Roth IRA. Contributions to a Roth IRA are not tax deductible; however, qualified distributions, including potential earnings, are tax free if you have held your account for at least five years and are over age 59. Like a traditional IRA, you can contribute $5,500 ($6,500 for individuals age 50 or older) to a Roth IRA in 2017. Contributions are limited to the amount of earned income. Note that the limit applies to the total of all IRAs that a person may hold in a given tax year. Contributions phase out for single filers with AGIs between $118,000 and $133,000 and for married joint filers with AGIs between $186,000 and $196,000, in 2017. Withdrawals made prior to age 59 may be subject to a 10% Federal income tax penalty, unless certain qualified exceptions apply. Note: A nonworking spouse can fund an IRA or Roth IRA based on the earned income of the working spouse.
Purchase a fixed annuity. Because an annuity is not subject to income limitations, it can be a valuable addition to your long-term savings program. With a fixed annuity, premium payments accumulate on a tax-deferred basis, and you receive a guarantee that your money will earn interest at a specified rate and that your return (the money paid back to you) will occur on a set schedule in fixed amounts. In general, annuity payments are guaranteed by the issuing company and are based on that companys continued ability to pay claims.
It is important to plan for retirement by preparing to supplement your Social Security benefits. With a disciplined approach to saving, you will be on track to enjoying the retirement you envision.