Social Security: To Draw or Not to Draw (too soon)

I am going to tell you right from the beginning: there is no easy answer for when to begin to draw your Social Security. But there are some things you can do to help make the decision easier. And if you have done your retirement planning homework (saved, invested, planned),  the decision will come as one of the many you have to make to as you approach this crossroad and if you have, it wil be much easier.


Drawing early is technically a bad move for a lot of people. It limits how much you can get monthly. Yet on the other hand, retiring at 62 years old is not an option for some. In this instance, the early retirement draw on Social Security usually suggests less optimism for a long life. If you have experienced a hard-scrabble career, one that was not done at a desk job, the lure of getting a little respite is often the only consideration. Knowing that you can still earn some additional income while drawing an early benefit is often a comfort to this group.

There is no denying that this decision is a highly personal one. And there is no right answer for everyone. But there are some things to consider. For instance, if you are going to be the first to retire in your household, and your spouse is eligible or capable of waiting until full retirement age (which could adjust your benefit slightly when they do), you should have a Roth IRA or a Roth 401(k) to get you through the lean years. This already-taxed account will help with the tax considerations - and there are many.

Taxes play a huge and significant role in your decision. You will definitely want to consult as well-recommended tax professional a year or two prior to retirement. They may advise a tax strategy that could net you a higher benefit (if you are drawing early, your benefit is based on the last and highest income year) and give you options for increasing that benefit through another sort of plan that is little heralded by the SSA: paying it all back.

This is done by paying your benefits back in full at your full retirement age to net the maximum allowable benefit. Retire at 62 and pay them back at 66 would require a payment of about $36,000 (based on the average payment of $750 a month for four years). This cash might come from the sale of a home, the lump sum payment of a 401(k) plan or simply from the Roth you have. It will however, close a $250 a month gap - which might be more than your Roth could guarantee.

Another potential consideration is how much you make in your final year of work. If it is your highest earning year, your benefit will be adjusted to reflect that income. You may be eligible for benefit increases when your spouse reaches retirement if their benefit (and this is also based on the decision of when you begin to draw your own benefits).

You could fund your Roth with those SS payments, withdraw the already taxed deposits and pay it back for the higher SS benefit. Rough calculations on this sort of move - remember, get tax help - could look something like this: $750 to your Roth taxed at 15% with a modest return of 5%; $36 returned to SSA with the investment return remaining in the Roth; taxes adjusted and the new higher benefit, which acts as a 25% return on the four years you invested/saved the money, works out to be a net profit for those that are able to do so.

But check with your tax person to see whether this is feasible or not.

Paul Petillo is the Managing Editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

The Tax Question: Roth or Traditional, 401(k) or IRA

You don't know what your taxes will be when your retire.  You don't really know whether your retirement expenses will exceed your projections or not.  In fact, your retirement picture might just be a little on the hazy side of things.  So how do you make the decision of whether to use a Roth 401(k) or the traditional 401(k)?

This can be easier than you think.  More...
Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer

Time, Transfers and Temptations: The Overcomplicated 401(k)

While the 401(k) plan you have access to at your place of employment is a a "better-than-nothing" retirement plan doesn't mean that you should ignore the benefits of investing for your future.

There are three basic problems with the retirement plan (and how you use it) known as the 401(k).

First, for many of us, it has not been around long enough for us to take full advantage of what this type of investment scheme can offer. A full thirty years or more would be considered the optimum amount of time - which makes this a young investors game. The older investor probably has had less than fifteen years to date to grow a plan that they believe will provide enough post-work income to allow them to retire well.

People who do not have that much time should be attempting to max out the plan (either the most you can contribute or the most the IRS will allow) and keep more than what those sage financial planners suggest in stocks. Even if the equity exposure is spread across a variety of index funds, moving too much into a conservative investment such as fixed income too early will drive the available balance and potential earnings down.

For people who are in this age bracket, the focus should shift to getting your financial house in order while you have the time. Set your mortgage up for payoff as soon as possible. This can be done a number of ways: refinancing or paying down the mortgage in advance of the scheduled payoff date. While a refi is good, unless you are getting an interest rate reduction of one percentage point of better, the cost of a new loan and the ability to get one in this sort of slumping economy might not be the best way to spend those dollars.

Instead, begin a prepayment plan that is both safe and easy and has the most flexibility. For instance, did you know that if you pay one extra month a year (divided over twelve months payments - $1200 a month mortgage payment divided by twelve would allow you to make a $1300 payment) would shorten the length of the loan by eight years? A fourteenth month payment would bring the total length of the loan down to about sixteen years. This is without costly refinancing and allows you to do what you can if you can afford it. Avoid the lenders offer of a twice-a-month payment plan and secondly, be sure that when you do this, mark the extra payment as "for principal".

Do I need to tell you to do what you can to eliminate any and all outstanding credit? If you cannot payoff what you have borrowed at the end of each month, you have borrowed more than you can afford.

Secondly, your retirement account is not a savings account. It is an investment for your future. Not one single dime should be withdrawn for any other purpose than your retirement. When you are transferring a 401(k) due to a job loss or a new job, make sure you roll it over into an IRA and name a Trust or Trustee. Failure to do so will result in taxes charged against you as if you had simply withdrawn the money.

And lastly, you will not be able to invest as much but the opportunities are greater. IRAs will not provide you with as great of a pre-tax advantages as your 401(k) did, but the choices you will have as result of getting out of not-so-good plan are incredible. Shopping on the open market for a mutual fund or funds allows you to move your move across the full breadth and depth of the market, control the expenses and fees and allow you to set your goals (in terms of risk) far better.

Many 401(k) plans force employees to purchase company stock which make them less diversified. Getting out from under this type of plan will stand to be the best thing that changing jobs could offer. Granted, if your company matched contributions (some still do and many more will begin to do so again in the next several years) this will no longer happen. This is a big loss of free money. Use this as a criteria for your next job and insist it be part of the benefit package.

You can still set up an automatic payments withdrawals from your checking or savings account but there are limits. In 2010, the limit for your IRA, which is what your new rollover plan is called, will be $5,000 for individuals and $6,000 if you are over fifty. You could, if you can afford to do so, open a Roth IRA as well (a rollover into a Roth will prompt a tax penalty because Roth plans are after tax accounts). This will allow you an additional $5,000 contribution.

Keep in mind that you only have a sixty day window to do this. Your old employer may allow you to stay in your old plan. The 60 days begins when you start the action or they tell you they want you out.

What to keep in mind about your 401(k) plan and rollovers:
If you have a 401(k) plan use it and if possible, use it to its fullest.
Get your financial house in order while you are working, especially if you have only been in your 401(k) plan for less than fifteen years.
Rollover your old 401(k) into a Traditional IRA within 60 days and be careful with the paperwork. If you have more money to invest, open a Roth as well.

Paul Petillo is the Managing Editor of BlueCollarDollar.com and a fellow Boomer