From a distance, Social Security seems like a pretty straightforward program. You pay into the system while you're working. Then, once you retire, you collect from it. While that holds true in general, the specifics in the way it is designed means you have some flexibility in how you collect it and how you use the money in your retirement plan.
With that in mind, there are several different strategies you can use with Social Security to have it help bankroll your retirement. Some of them require pre-planning, though, so it's best to get started well before you're ready to collect. These three strategies should give you some great ideas on how to leverage Social Security as part of a larger plan.
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No. 1: The default: Take the money and spend it
If you don't do much in the way of planning, pretty much by default, you'll end up filing to collect Social Security only to spend the money that comes in. While that's a perfectly acceptable use of the money, it also can be extremely limiting. The average retiree currently receives around $1,671 per month from Social Security.
If that's enough to cover your lifestyle, then congratulations -- you'll likely be just fine. It is enough to keep a single person above the poverty line in all 50 states. As long as you don't have high base expenses or an expectation of a particularly lavish lifestyle, that may be enough to see you through your retirement.
Of course, Social Security was never intended to be the sole source of your retirement cash. So if you have a way of getting another source of money, potentially better Social Security strategies begin to become available to you.
No. 2: Delay filing and boost your monthly income throughout your lifetime
You have a choice as to when you start collecting your Social Security. You can start your payments at any time once you turn 62, and the longer you wait -- up until age 70 -- the higher your monthly benefit will be. This helps in two ways.
First, as long as the program's Trust Funds last, Social Security's payments provide a guaranteed source of income for its beneficiaries. Even once those trust funds are empty, if nothing else changes, the program expects to be able to pay out around 75% of what its recipients expect.
Second, Social Security offers its recipients an annual inflation adjustment based on their previous benefit level. The higher your monthly benefit amount, the larger the absolute dollar boost you'll get from that inflation adjustment.
Of course, the trade-off is that the longer you wait to collect Social Security, the longer you'll have to work or the more of your early retirement costs you'll have to cover from your other finances. In addition, if you end up with a shorter-than-average lifespan, by delaying your claim, you may receive less money over your lifetime than you initially hoped you would have.
No. 3: File early and use the money to help with Roth IRA conversions
If you have a decent balance in your traditional-style retirement accounts, then you might want to get some of that money into a Roth IRA before your reach the age of 72. This is because once you reach 72, you are subject to required minimum distributions from most of your retirement accounts but not your Roth IRAs. In addition, once money is inside your Roth IRA, it can compound tax-free for the rest of your life and be passed on to your heirs in a more tax-efficient way than a traditional retirement account can.
The challenge with a Roth IRA conversion is that you need to pay taxes on the money you convert. If you're able to cover those conversion taxes from a source of cash outside of your IRA itself, you can keep that much more working for you in that tax- and RMD-free Roth IRA. As a result, taking your Social Security money early and using it to help cover your Roth IRA conversion taxes is a great approach to getting more money in your Roth IRA earlier in your retirement.
Again, there are trade-offs. First, by taking your Social Security early, your monthly benefit amount will be less than had you delayed your payments. Second, there's a five-year waiting period after you first fund a Roth IRA (either directly or via conversions) before you can tap your earnings tax-free if you plan to spend them. As a result, it helps if you either have a pre-existing Roth IRA or if you can be sure you won't need to tap the account before five years have passed.
The choice is yours if you plan ahead
If you plan ahead, you can choose to simply spend your Social Security benefit, try to maximize it by delaying your claim, or use it to help boost the amount you can keep of your Roth IRA conversions. Whichever selection you would like to make, the sooner you get started with your end-to-end retirement plan, the better your chances are of success. So get started now and maximize your ability to leverage Social Security to bankroll your retirement.
