Get Something From Social Security

Want to liven up a party? Yell something like "Social Security is the best thing the government ever invented," or "Social Security is a huge Ponzi scheme that is doomed to crash!" Either one will elicit cheers and jeers, at which point the partygoers will engage in well-thought-out discussions based on facts and evidence. Or attack each other with cheese knives.

Whatever happens, here's something all partygoers can agree on: No one should plan to retire on Social Security alone, even if benefits never get cut. As of June 2010, the average annual retirement benefit was $14,040. It would be tough to retire to Florida or buy an RV on that amount, let alone have enough to buy, like, food and stuff.

Less payroll pain (for now)
The Social Security program is paid for by a 6.2% tax on your paycheck (1.45% is also taken out for Medicare; employers kick in an equal amount for both). However, the tax deal done last December cut the Social Security tax that employees will pay throughout 2011 to 4.2%. The government would like you to spend that extra 2% of your income in order to stimulate the economy.

Don't fall for it.

Instead, use that money to increase your savings rate by 2% (more is even better!) and invest in retirement benefits that you, not politicians, control. In other words, use your bigger paycheck to buy stocks.

You might be saying, "How much can saving just 2% really do for my retirement?" That depends, of course, on how long it is until you retire, but here's one of those handy-dandy charts showing how much you could hypothetically have (assuming an 8% annual return):

Source: An Excel spreadsheet on my computer. Come take a look if you don't believe me. I dare you.

Impressed? If not, compare those amounts to how much more you'd have for retirement if you decide to spend the money rather than invest it:

Source: Author's estimates.

And yes, I'm assuming that you will not only save more this year thanks to lower payroll taxes, but also continue to save an extra Benjamin or two a month until you retire. After all, you'll inevitably see the wisdom of doing so, and the higher payroll taxes you pay in 2012 and onward will be offset by the (hopefully) at-least-2% raise you'll earn a year from now.

Where to put it
OK, so you've seen the financial wisdom of saving an extra $100 or $200 (or more!) a month. The next question: What to do with that money?

That's really two questions: 

1. Which type of account, and 
2. Which type of investments? 

Starting with the former, contribute to an employer-sponsored account -- such as a 401(k) -- up to the point where you take full advantage of a match. From there, it's worth considering an IRA, since you'll likely have more investment options and at lower costs. Of course, it's best to max out both an IRA and your 401(k), if you can. 

Don't forget: You still have time (until April 18, to be precise) to contribute to an IRA for 2010. So, if you want to earn that retirement-saving gold star, max out an IRA for 2010, then sign up for an automatic investment plan into an IRA for 2011. For help with choose the right discount broker for your IRA, visit the Fool's Broker Center.

As for which stocks to buy, that depends to some degree on how much you're investing. We at the Fool generally recommend that you keep transaction costs to 2% or less than the amount you're investing. So if you're investing $100 a month, your best bet might be a no-load mutual fund. With larger amounts, you can buy a few shares of stock each month without the commissions eating too much into your principal.

In my latest issue of Rule Your Retirement, I discussed how a lot of experts are extolling the cheapness of U.S. large-cap stocks these days. While it makes me nervous to be siding with a growing consensus, I also think blue chips from the Red, White, and Blue offer the best prospects. 

We've highlighted consumer giants Kimberly-Clark (NYSE: KMB) and Johnson & Johnson (NYSE: JNJ) as well as industrial blue-chip Waste Management (NYSE: WM) and payroll specialist Paychex (Nasdaq: PAYX) for their high dividend yields and dependable business models. If you're looking for mutual fund ideas, Amanda Kish, advisor for our Champion Funds service (a free bonus that comes with a Rule Your Retirement subscription), likes funds like Fidelity Contrafund (FCNTX) that have a well-established track record and knowledgeable managers on board.

Whatever you do with the extra 2% you'll find in each paycheck this year, put it somewhere that will still be around many years from now. That way, when you get that $14,040 (or whatever) from Social Security in retirement, you'll be able to say, "Whew! I was glad I did that."