Social Security will be one of your most important income sources in retirement. Although these benefits replace only around 40% of pre-retirement earnings, they're valuable because they're guaranteed to last for life and protected against the effects of inflation.
While the average Social Security benefit isn't enough to live on by itself, there are some things you can do now to make your future benefits bigger. Here are two moves to make if you're younger and working and want larger checks later.
1. Invest in a Roth IRA
You'll need supplementary income from a retirement savings account to add to your Social Security benefits.
There are many tax-advantaged accounts you can use to save the money you need. But if you want the most money from Social Security, you should likely choose a Roth IRA or Roth 401(k) if you have access to one.
It may seem odd that your choice of retirement account would affect your Social Security benefits, but there's a simple reason choosing a Roth matters. See, Social Security benefits become partly taxable once provisional income hits a certain threshold. And that threshold is pretty low — $25,000 for single tax filers and $32,000 for married joint filers. It's also not indexed to inflation, so more people are taxed every year because incomes naturally increase over time.
If you lose Social Security benefits to taxes, obviously your benefits won't be worth at much. But the key is that it's “provisional” income that matters. Provisional income equals half your Social Security check plus taxable income. Roth income isn't taxable so it doesn't count, and you can withdraw the money you need without worrying about the de facto cut to Social Security that occurs if the IRS takes a cut.
2. Invest enough to live on savings alone
If you want to make sure you supersize your Social Security checks, it's also a good idea to bulk up your retirement investment accounts. Specifically, you'll want to make sure you're setting your investment goals so you can live on your savings alone without Social Security for several years.
Taking this step may be the ticket to delaying your Social Security benefits claim even if you have to retire early.
Many people plan to start getting their retirement benefits later in life because delaying a claim for Social Security allows you to grow the amount of your monthly benefit. Unfortunately, a lack of available jobs, or health or family issues often force people to retire before they are ready.
If you must unexpectedly leave the workforce early, you'll want to be able to live on savings alone so you aren't forced to start Social Security sooner than planned — thereby taking a permanent hit to your monthly benefit.
If you've got plenty of money in a Roth IRA, you can rely on your savings alone until you've reached 70 and claim the largest possible Social Security check. You can then hopefully enjoy tax-free benefits for the rest of retirement, keeping as much money as possible in your pocket.
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