Ladenburg Thalmann Asset Management CEO Phil Blancato shares his advice on how to save for the golden years.
Individual retirement arrangements, more commonly known as IRAs, are powerful retirement savings tools with tax advantages that most of us should take full advantage of. Along with Social Security income, they can be vital support in our last decades.
Here is a look at what are traditional and Roth IRAs and three ways in which they can be perfect supplements to your Social Security income.
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Traditional and Roth IRAs
Traditional and Roth IRAs offer savings with tax advantages, but tax incentives are different. The traditional IRA accepts contributions on a pre-tax basis: you are able to reduce your taxable income by the amount of your contribution, which reduces your tax bill for the year of contribution. However, there is taxation: when you withdraw money from the account later, usually in retirement, it will be taxable income.
While the traditional IRA offers an initial tax reduction, the Roth IRA offers a term reduction. Contributions to him do not reduce his taxes for the year of contribution, but the money in the account – and whatever grows – can be withdrawn in retirement without taxes.
For 2020 and 2021, you can contribute up to $ 6,000 per year in all of your combined IRAs, plus an additional $ 1,000 if you are 50 or older.
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1. Can you fill your income gap
The first way that an IRA can supplement your Social Security income is simply this: Social Security income alone is likely to provide only a fraction of the retirement income you need or want. The average monthly retirement benefit was recently just $ 1,547 – about $ 18,500 a year. If you earned above average salaries, you will receive more, but not yet a large sum. Therefore, adding to it through IRA savings can be a critical move.
Note that the contribution limits will increase over time, and you will also exceed the 50 year limit at some point, so it is quite possible that you can accumulate much more.
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2. Can help you retire early
Social Security is a vital support for most of us – in fact, it provides about a third of income for the elderly, and 21% of married elderly Social Security beneficiaries and 44% of singles receive 90% or more of your income from it. But the first age you can start collecting is 62 (and the last is 70).
If you want to retire at, say, 60, you will have to do so without Social Security income, at least for a while. Enter your IRA – you can start collecting IRAs at 59 and a half. (In fact, you can start early, but it is not recommended, as you will face an early withdrawal penalty.) So having a rich IRA from which to earn income can help you retire early, if you are lucky enough (or have been disciplined enough in their savings and investments) to be able to pay for it.
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3. Can help you wait and get bigger Social Security checks
This is another way an IRA can help with your Social Security: it can be part of an income-maximizing strategy. Understand that you can make your Social Security checks bigger or smaller by starting charging later or before your “full retirement age” – the age when you can start receiving all the benefits you are entitled to based on your history of work. (This age is 66 or 67 for most of us.)
If you have a decent chance of living a longer-than-average life, it will be worth delaying the start of Social Security collection as long as you can – preferably until you’re 70. An IRA’s income can help you survive until your Social Security checks start to flow. (Another reason to delay Social Security collection, if you are married and make more money, is to make your checks as large as possible for when you or your spouse are widowed – and to be able to claim the larger of your two benefit checks.)
It is worth reading about retirement strategies and how to save and invest effectively for the future. A few hours spent learning more can earn you many thousands of dollars more in your golden years.