Phil Blancato, CEO of Ladenburg Thalmann Asset Management, shares his advice on saving for the golden years.
Individual retirement plans, more commonly known as IRAs, are powerful tax-advantaged retirement savings tools that most of us should make the most of. Together with Social Security income, they can be a vital support in our later decades.
Here’s a look at what traditional and Roth IRAs are, and three ways they can perfectly complement your Social Security income.
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Traditional and Roth IRAs
Traditional and Roth IRAs both offer tax benefits, but the tax benefits are different. The traditional IRA accepts pre-tax contributions: You are allowed to reduce your taxable income by the amount of your contribution, reducing your tax bill for the year of the contribution. There is tax, however: when you withdraw money from the account later, usually after retirement, it is taxable income.
While the traditional IRA offers an upfront tax break, the Roth IRA offers a back-end. Contributing to it won’t shrink your taxes for the year of the contribution, but the money in the account – whatever it becomes – can be withdrawn tax-free as a pension.
For 2020 and 2021, you can contribute up to $ 6,000 per year in all of your IRAs combined, plus an additional $ 1,000 if you’re 50 or older.
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1. It can fill your income gap
The first way an IRA can supplement your Social Security income is simply this: Social Security income alone will likely only provide a fraction of the retirement income you need or want. Average monthly retirement benefits were recently just $ 1,547 – about $ 18,500 per year. If you’ve earned above-average wages, you’ll receive more, but still not a huge amount. So adding IRA savings can be a critical step.
Keep in mind that contribution limits will increase over time and you will also exceed the 50-year mark at some point, so it is very possible that you can accumulate a lot more.
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2. It can help you retire earlier
Social security is an essential support for most of us – it indeed provides about a third of the income of the elderly, and fully 21% of married elderly social security recipients and 44% of unmarried people get 90% or more of their income from the . But the earliest age you can start collecting is 62 (and the latest is 70).
For example, if you want to retire for 60 years, you should at least do so without social security income for a while. Enter your IRA – you can start collecting IRAs from as early as 59 1/2 years. (You can actually start earlier, but it’s not recommended as you will be subject to an early withdrawal penalty.) So if you have a fat IRA from which to earn income, you can retire earlier, if you’re lucky (or if you are disciplined enough in your savings and investments) to pay for it.
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3. It can help you wait and get bigger Social Security checks
Here’s another way an IRA can help with your Social Security benefits: It can be part of an income-maximizing strategy. Understand that you can increase or decrease your Social Security checks by starting to collect later or earlier than your “full retirement age” – the age at which you can receive the full benefits to which you are entitled based on your employment history. (That age is 66 or 67 years old for most of us.)
If you have a decent chance of living a longer-than-average life, it’s worth delaying Social Security collection for as long as possible – ideally until age 70. Income from an IRA can help you make ends meet until your Social Security checks start to flow. (Another reason to delay Social Security collection, if you’re married and are the top earner, is to make your checks as big as possible for when you or your spouse is widowed – and able to make the largest of claim your two benefits checks.)
It’s worth reading about retirement strategies and how to save and invest effectively for your future. Spending a few hours learning more can leave you with many thousands of dollars more in your golden years.