The Guide to Social Security - How to Pay Fewer Taxes

Most individuals in or near retirement have three financial legs to support them in retirement: Social Security benefits; qualified retirement savings [401(k), IRA, 403(b), etc.] on which taxes have not yet been paid; non-qualified savings and investments on which taxes have been paid on the principal and possibly some or all of the earnings. By carefully coordinating the use of these three sources of money, the typical retirement-minded couple can add up to 20% to their after-tax income and afford a better retirement lifestyle. Unfortunately, most couples in or near retirement overlook the importance of coordinating the uses of their available money. The results are higher tax bills and lower lifestyles in retirement. Both can be avoided.

In what follows, you will be shown how the typical retired couple can add as much as 20% to their after-tax retirement income just by coordinating when to use the different categories of their money. There is nothing to buy, no risky investments to make or additional money needed: you just use what you have smarter. This is very important for a married couple because one spouse could spend as much as one-third of their lifetime in retirement.

Conventional wisdom says to delay the use of your qualified money as long as possible in retirement because it grows faster due to the tax deferral. Generally, the conventional wisdom is wrong. The millions who have heeded this inappropriate advice will have less after-tax money to support them in retirement. This Guide will show you that qualified money should be used first so you can delay taking Social Security benefits as long as possible. There are also tax advantages to using your non-qualified money last in retirement. This timing can give you more after-tax income in retirement and a better lifestyle.

Unless you have substantially more money than needed for retirement, it is foolish to pay taxes you can avoid by simply changing the timing of how your three categories of money are used in retirement. The typical retiree's greatest fear, and also the greatest challenge, is to not run out of money before they run out of breath. Many are in danger of losing this battle because the Center for Retirement Research is now reporting that 43% of U.S. households headed by workers ages 34-60 are in danger of having 90% or less of the money they'll need to maintain their lifestyle in retirement. According to one recent study reported in Retirement Weekly:"The average American family is on track to replace 57% of its annual pre-retirement income, some 28 percentage points less than the minimum 85% figure experts typically say retirees will need to live on in their golden years".

You can stretch your retirement money by up to 20%. Before we can discuss when and how to use the three categories, each needs to be identified and defined. You may receive other categories of money, e.g., inheritance, life insurance benefits, loans, reverse mortgage proceeds, trust income, lottery (dream on) and support from family members, but these will not be discussed in this Guide. Also, in the following discussion we've assumed the "average" retirement-minded couple; however, there are many exceptions, and we recommend you seek professional advice before taking action.

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