As I’ve written about in the past, an IRA is a great way to save for retirement. If you qualify, you can stash money away for retirement, deduct your contributions from your taxable income, and let your nest egg grow tax-deferred until you take it out during retirement.

The rules on contribution limits and whether your contributions are tax deductible, however, can be really confusing. What some fail to realize is that anybody with earned income can contribute to a traditional IRA. However, your contributions may not be deductible.

When it comes to whether IRA contributions are deductible, there are very specific eligibility requirements based on factors such as your income and the retirement plans you or your spouse have at work. To figure out these limits, we need to look at several factors:

• Are you are contributing to a traditional IRA, Roth IRA, or both?
• Will you be 50 years of age or older by the end of 2012?
• Your modified adjusted gross income (MAGI)
• Your taxable compensation
• Are you or your spouse covered by a retirement plan at work?

With these factors in mind, let’s take a look at the IRA contribution and deduction rules for 2012.

2012 Traditional IRA Contribution Limits

The 2012 traditional IRA contribution limits did not change from 2011. The maximum amount you’re allowed to contribute is $5,000. If you’re 50 or older by the end of 2012 you may also be eligible for the additional “catch up contribution”. The “catch up contribution” allows for an additional $1,000 (for a total of $6,000).

The maximum amount you are able to contribute can be split between a Roth IRA and traditional IRA, but it still can’t exceed $5,000 ($6,000 if you’re 50 years old or older). We have taken the current figures provided by the IRS and combined them with the numbers over the last several years to give you a comparison. As you can see nothing has changed since 2008.

There are a few things to remember when it comes to these limits.

1. The contribution limits are combined and you must add together a traditional and Roth IRA contributions, even if you have multiple IRA accounts.
2. You can’t contribute more than you make. So, if your taxable compensation in 2012 falls below the contribution limits, then the amount you make becomes your contribution limit.
3. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).

Are Your Contributions Deductible?

Here’s where things get a bit more complicated. In 2012, the modified adjusted gross income or AGI limits for deductible IRAs were raised. We have two sets of tables below to help you wade through the details. The first table is for those that are covered by a retirement plan at work and the second table is for those who are not covered.

Since I’m not a tax expert, I refereed to the IRS website for the relevant information needed to create the tables. I’ve included links to the IRS source pages so that you can review the details for yourself.

2012 IRA Contribution and Deduction Limits – Covered by Employer

Source: Official IRS version

2012 IRA Contribution and Deduction Limits – Not Covered by Employer

Source: Official IRS version

If you’d like to open an IRA account, visit Mint.com to see several IRA options.

Recently a reader e-mailed me with the following question:

I definitely do want to open a Roth IRA as soon as possible because I hear it’s typically better than the Traditional IRA. However, I’m not certain whether one should be putting money way in one’s 401K or Roth. As you can tell, I’m not that financially knowledgeable. I do have some credit card debt that shouldn’t take too long to pay off and of course I have some student loans. I’m guessing you’re recommending me to pay off my credit card debt first before opening a Roth IRA. My student loans on the other hand will take a while to pay off.

I receive questions like this a lot, and so today we’ll walk through an approach you can use to answer these questions for yourself.

Save versus pay off debt–it doesn’t really matter

If you are living below your means and either saving the difference or using the excess cash to pay off credit cards, you’re moving in the right direction. Certainly you can base your decision by comparing the interest rate on the credit cards and the returns you believe you’ll earn on your investments.

If the interest rate on the credit card is higher than the returns you’re likely to earn on the investments, the math would tell you to pay of the debt first. Fine. But the reality is that if you consistently live below your means, in the long run it probably won’t matter in which order you invest or pay off debt. If your debt is at a very high interest rate, however, paying it off first is probably best.

Also, the decision is not all or nothing. You can split your excess cash between savings and paying off debt. That’s what I did when I was clawing my way out of credit card debt. And if you have a lot of debt that will take years to pay off, I believe waiting that long to save for emergencies and retirement generally is a mistake. Even if you save just a little, developing the habit of saving and investing is too important in my opinion to be put on hold for very long.

Does your employer match 401(k) contributions?

Whether your employer matches contributions is important both to the question of investing versus debt reduction and investing in a 401(k) versus Roth IRA. If there is a match, failing to take advantage of it is leaving free money on the table. Of course, there could be situations where your finances are in such dire shape that contributing to a 401(k) is impossible. But apart from extreme situations, an employer match is a significant incentive to contribute enough to a 401(k) plan to take advantage of the match.

Investing in a 401(k) versus Roth IRA

There are a number of factors to consider here:

• Does your income qualify you to invest in a Roth IRA? In 2012, a married couple filing a joint return can invest in a Roth IRA if their modified AGI is less than $183,000 (although the amount they can invest begins to decline at $173,000). We’ll assume that you can invest in a Roth IRA (if you want to open a Roth IRA< check out our list of the best brokers for IRA accounts).
• Does your employer match 401(k) contributions? As mentioned above, if your employer does match contributions, the 401(k) is probably the best bet. We’ll assume going forward that your employer does not match your contributions
• How old are you? This may seem like an odd question, but here’s why it’s important. If you are in your 20s or 30s, you likely are in a relatively low tax bracket. Therefore, paying taxes on your Roth contributions today is likely to be more profitable than waiting to pay the taxes in retirement. In fact, if you use one of the many calculators to determine which is better (here’s one), you’ll find that they almost always favor the Roth, particularly if you are in a low tax bracket.
• What will you do with the tax savings if you invest in a traditional retirement account? Because traditional 401(k) contributions are excluded from income tax, you’ll have more take-home pay than if you invest in either a Roth 401(k) or a Roth IRA. If you invest that savings, than the choice between a Roth and traditional savings vehicle is generally a close call (although I still am partial to Roth accounts). But if you don’t invest that savings, the Roth is a clear winner.
• What are your investment options in your 401(k)? Unfortunately, many 401(k)s don’t offer great investment choices. That’s the situation I have at my job. We have a couple hundred options, and with the exception of a couple of funds, they are all bad. Most of them have expense ratios of more than 1%. With a Roth IRA, you can choose where to open the account and invest in just about anything.
• When will you need the money? When and under what circumstances you can take money out differs between a 401(k) and an IRA. What your loved ones can do with the dough if you pass away is also different. These might not be major considerations for you, but if they are, I can recommend two books: Retire Secure!: Pay Taxes Later – The Key to Making Your Money Last, 2nd Edition. I have this book, and it is very informative.
• How much do you have to invest? The contribution limits are higher for a 401(k) than a Roth IRA. Of course, you could always max out the Roth IRA and invest in a 401(k).
• One final thought–consider tax diversification. The fact is we don’t know what tax rates will be a year from now, let alone when we retire. So keep in mind that you can invest in both a traditional 401(k) and a Roth IRA retirement account (assuming your income doesn’t disqualify you). And if your employer offers a Roth 401(k), there is no disqualification based on your income. This is the approach I plan to take now that my employer offers a Roth 401(k).

Are there other factors you consider in making these decisions?

The Social Security Administration announced that monthly Social Security and Supplemental Security Income (SSI) benefits will increase 3.6 percent in 2012. Called a Cost-of-Living Adjustment, or COLA for short, the 3.6% increase is the first raise in benfits since 2009.

About 55 million Social Security beneficiaries will see the increase beginning in January 2012. Another 8 million Americans will receive increases in SSI benefits as of December 31, 2011. Although the increase is good news for seniors, it’s a bit of a mixed blessing for two reasons.

First, medicare premiums are expected to rise, too. As SSA acknowledged, for some beneficiaries, “their Social Security increase may be partially or completely offset by increases in Medicare premiums.” Increases in medicare payments have not yet been announced. When the increases are released, they will be available at www.Medicare.gov

Second, the amount of income subject to the social security tax will also rise by about 3 percent. The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $110,100 from $106,800. While this of course only affects folks making more than $106,800 a year, it results in a tax increase for about 10 million taxpayers.

So let’s talk turkey. What does 3.6% translate into for most seniors. According to CNN, the average monthly check will increase $43, to $1,229, while for the disabled, it will rise $39 to $1,111.

(Chart Source: CNN)

If you’re about to retire, you’ve got to be deadly serious about your retirement income security. All kinds of thoughts might be running through your head; “What if I need more income for some unexpected reason? What if my investments don’t do as well as planned? What if I live longer than I expect? Should I start looking into small business ideas once I retire?” These are just a few of the worries that are – or will – go through your head. Fortunately, there are solutions.

Keep in mind that if you’re concerned about having too little money in the future, the longer you delay taking action, the greater that fear should be. Every year you wait increases your risks of completely running out of money. The good news is, you can make relatively small adjustments now and they’ll pay off big time down the line.

In order to take that action, you need three very important things:

1. Balance

Your financial stability is a function of balancing three things; income, assets and spending. When you have a balance between these three, you’ve got a smooth retirement ride ahead of you. When any one of these are out of whack, you’re looking for trouble. Let me give you an example.

I met a man several years ago who was worth over $5 million and he earned over $400,000 a year. He had a great business and strong investments. When we met, he asked me one simple question: How much money do I need to retire?

I told him he needed about $20 million. After he put himself back up on his chair, he asked how I got to that number. He told me earlier that he was spending over $800,000 a year (pre-tax). Once he retired, he’d no longer have any business income so he’d need to replace that $800,000 somehow. If he could withdraw 4% on his assets, he’d need $20 million to produce that $800,000. He failed to understand the relationship between assets, income and spending.

Unfortunately, this person was spending down his assets even before he retired so each year he worked (and overspent) meant his retirement was further and further away. In other words, each year that he took out more than 4%, he was actually exhausting his account. When that happens, values decline. His $5 million portfolio was like a melting snow ball in mid-July. Soon, all he’s going to have left is a hand full of mud. In order to have income security, you have to stop the melting. Right?

Let’s move on to the second important ingredient for retirement income security.

2. Knowledge

In order to never worry about retirement income, you have to know what your income is going to be and how much it will cost you to live. It’s relatively easy to project your retirement income but it’s not so easy to forecast your spending. Of course things are going to change. Perhaps you’ll travel more. Maybe your mortgage will be paid off. And if you’re really lucky, maybe your children won’t be living with you.

These are all things that are very hard to predict. But you are far better of by making an effort and doing your best than to ignore this issue of spending. A great place to start is to track your spending now and then make adjustments. When I ask people what it costs them to live, they typically underestimate it by 30%. Track your spending for 12 to 24 months and get an average. That will be the best number for you to work off of. Without considering your cost of living during retirement, you’ll never have financial security. This is the number one most important step you can take.

You can see that if your expenses remain too high, you’ll be forced to spend down your assets. And as we saw above, once you do that, your income decreases because the asset base shrinks. Bottom line? Track your spending and match it to income.

3. Project and Adjust

Once you have a good idea about your retirement income and you’re retirement cost of living, you have something you can build on. Of course there will be inflation and changes. That’s why you’ll have to start creating a financial plan for yourself each year. The good news is it’s not hard to do and you can get this done for free. (If you are young when you retire and your income just meets your expenses, you’re going to have to make adjustments. Inflation is going to play a major part in your retirement life and it’s going to make things harder.)

Understand that balance between income, assets and spending. Track your spending, project out and make adjustments as needed. This will not be a perfect plan but if you take these steps you’ll be ahead of 90% of your peers. And you’ll have a lot less to worry about when it comes time to trade in your desk for some airplane tickets to visit your grandchildren.

What have you done to safeguard your retirement income?

This is a guest post from Neal Frankle, Certified Financial Planner in Los Angeles and the author of Wealth Pilgrim, a blog to help others make smart decisions about their finances.

An annuity is an insurance product by which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities can be used as part of a retirement strategy as many retirees want to receive a steady stream of income. In a nutshell, an annuity works as follows: you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment. Additionally, the amount you receive at each payment depends on what type of annuity you opt for.  There are generally two types of annuities: a fixed annuity or a variable annuity.

Fixed Annuities

Fixed annuities are CD-like investments issued by insurance companies; they pay guaranteed rates of interest, most times higher than bank CDs. Fixed annuities can be deferred or immediate. As it pertains to a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, usually in retirement i.e., the deferred annuity accumulates money. With an immediate annuity, you begin to receive payments soon after you make your initial investment. For example, you might consider purchasing an immediate annuity as you approach retirement age.

If you choose a fixed-rate annuity, the insurance company handles choosing the investments and pays you a pre-determined fixed return. Fixed rate annuities are attractive because they provide investors with the comfort of receiving a set payout; this is especially important for retirees who want a known income stream to supplement other retirement income. It is also ideal for investors who are risk averse and do not have the “heart” to deal with the volatility of the stock market. They also offer low investment minimums of $1,000 to $10,000.

From a tax perspective, the interest with fixed annuities is not taxed until it is withdrawn. Be aware, however, the rates on fixed annuities may be fixed only for a limited period, after which they drop. At that time, if you do not like the new rate and want to withdraw your money early, heavy surrender charges could apply. Finally, one must consider the impact that inflation will have on your fixed payment. As the payments are not adjusted for inflation, the purchasing power of the payment will decrease over time as inflation rises.

Variable Annuities

The other type of annuity is a variable annuity. A variable annuity is a tax-deferred retirement vehicle that pays you a level of income in retirement that is determined by the performance of the investments. Unlike a fixed annuity, the investor has control over how his/her money is invested in the sub-accounts (essentially mutual funds or a limited amount of individual stocks) offered within the annuity. The value, therefore, depends on the underlying performance of the investments. While a variable annuity also has the benefit of tax-deferred growth, annual expenses tend to be much higher than those for regular mutual funds. By being able to choose a variety of the investments, the investor has more upside potential and the ability to outpace inflation.

Of course with the positives, there are also the negatives. The risks of investing in a variable annuity include

• Investment Risk & Taxes – Although long-term gains are deferred until withdrawal, upon withdrawal they are taxed at ordinary income rates rather than capital gains rates
• Fees – Aside from a surrender fee you face for early withdrawal, variable annuities can have steep sales commissions, management fees, etc.

Industry experts recommend variable annuities only if you have maximized your 401(k) and IRA contributions. Variable annuities are also regulated by the SEC while fixed annuities are not.

Equity Indexed Annuities

A third type of annuity which is not considered a “run of the mill” annuity is an equity-indexed annuity. During the accumulation period while you are making either a lump sum payment or a series of payments, the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. In other words, if stocks rise, you benefit from the increase. If stocks fall, you do not lose any money. However, the company that issues the annuity will also so limit the maximum returns that you receive in return for the downside protection they provide. The limit depends on the particular indexing method used.  The most common method is called the “participation rate” and works as follows: the insurance company may set the participation at 90% (some companies are as low as 50%), which means the annuity would be credited with 90% of the growth experienced by the index. If the index gained 10%, your gain would be 9% for that year. Essentially, you’re trading 100% of the market risk in order to receive a share of the market gain.

After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum. Equity-indexed annuities combine features of traditional insurance products such as a guaranteed minimum return and traditional securities. These annuities are anything but simple and there are several methods insurance companies use to index. Make sure you consult someone knowledgeable before you fall victim to what seems like a no-lose investment.

For the most part, annuities are viable investment options but there do appear to be many nuances and one must read the fine print and understand the product before investing. It may be wise to max out contributions to other retirement accounts, ROTH IRAs, IRAs, or 401(k)s before considering an annuity.

As part of the recent tax deal, President Obama has proposed a 2% reduction of the payroll tax paid by workers to support Social Security. While that would mean savings for working families, a worker making $50,000 in wages would bring home an extra $1,000, it would also mean smaller revenue for the Social Security Administration. Employees currently pay 6.2% of wages in Social Security tax, a contribution matched by their employers. The 6.2% paid by employers would remain unchanged. After all is said and done, the government will likely borrow $112 billion to fund the retirement and disability entitlement program this year.

Many say that this measure will be good for the economy. The dollars saved will be spent in local economies, spurring local business and job growth. Most economists and politicians agree that raising taxes during this deep of a recession would be risky business indeed. Others note that because the funds will be made up with borrowed dollars, the plan doesn’t do anything notable to Social Security’s long-term solvency. But how does that long-term outlook look right now?

Since the 1980’s, Social Security has amassed a trust fund in the amount of $2.5 trillion dollars. However, the government has borrowed that money to pay for other programs, issuing special Treasury bonds guaranteeing that the money will be repaid with interest.

Social Security is coming under fiscal pressure as increasing numbers of Baby Boomers begin to retire. Because the largest generation will be receiving Social Security benefits, and because the next largest generation is made up of young people who have yet to command high salaries, Social Security will pay out more in benefits than it takes in from payroll taxes for the first time since the 1980s. According to the most recent Social Security Administration trustees’ report, the trust’s funds will be depleted by 2037 if no changes are made to the program’s financial structure.

How this will affect young people currently in the beginning of their careers remains to be seen. The leaders of the recent bipartisan deficit reduction commission suggested raising the full retirement age from 67 to 69, for example.   Others have suggested adding means testing to Social Security. This would mean applying some measurement of retirement income or wealth to see whether or not a retired person required the added income of Social Security. Or, it could mean paying higher payroll taxes for Social Security once the Great Recession turns around and the economy can withstand the pressure of slightly higher taxation.

To sum up, Echo Boomers might find that they have to pay a bit more in Social Security taxes, wait a little longer to get their benefits, and may find they get a smaller amount if they can get by without a larger payout. One thing is for certain, how much you can rely on Social Security during your retirement is entirely uncertain. The only way to mitigate that risk is to save from day one. Start by fully funding your Individual Retirement Account, 401(k), or 403(b). Dollars banked during your twenties can compound to thousands by the time you retire. And since we can’t tell how much twenty-somethings will be able to rely on Uncle Sam, it’s best to rely on yourself.

The IRS recently released retirement savings contribution limits for 2011. These caps cover 401(k), 403(b), 457(b), and traditional IRA retirement accounts. For the most part, the limits are unchanged from 2010, although there are some small inflation adjustments with respect to qualifying income limitations.

So here are the 2011 401k and IRA contribution limits:

Elective Deferral: The contribution limits for 401(k), 403(b), 457(b) retirement plans for 2011 remain unchanged at $16,500.

Catch-up Contribution Limit: For those aged 50 or better, the catch-up contribution limits also remain unchanged at $5,500.

Traditional IRA Deduction Limits: Taken directly from the IRS Release: “The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010.”

“For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000.”

“For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.”

Overall Contribution Limit on Defined Contribution Plans: Finally, the limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged for 2011 at $49,000.

If you are looking to open an IRA account, check out our list of the best brokers for IRA accounts.

Social security, first passed in 1935 as part of Franklin Delano Roosevelt’s New Deal, encompasses a host of social insurance programs, including well-known federal benefits such as temporary assistance for needy families, unemployment insurance, Medicare, Medicaid, and the State Children’s Health Insurance Program. In common parlance, however, Social Security is usually used to refer to the benefits paid to elderly retirees, officially referred to as Federal Old-Age, Survivors, and Disability Insurance.

Recipients of benefits under the program, numbering around 58 million seniors across the United States, received a stiff dose of reality last week when the government announced that it would not increase benefit amounts this year. Instead, benefits will remain at the current rate until at least 2012. This is the second year benefits for seniors have remained stagnant.

This also marks the first time a year has passed without a benefit increase since the US government enacted automatic inflation adjustments in 1975. Those measures tie Social Security benefit raises to the Consumer Price Index, an economic measure that calculates inflation by tracking the rise in prices of consumer goods. When inflation is negative or unchanged, as it was both this year and last year, Social Security benefits remain at their current rates.

For currently retired seniors, this may mean tightening your belt. If you’re one of the 64% of retirees who rely on Social Security benefits for your primary source of income, you may have to find places to save. That can be tough to do when your primary income is the average Social Security check, which amounts to an average of $1,072 monthly dollars. But, don’t get disheartened yet! Saving money may not mean giving things up. First things first, read more articles here on Dough Roller for tips on how to save money. If you can get the same products and services you need and want for less, you may not need to give anything up. You’d be surprised how much money you can save by shopping around for insurance, and how much a cash back credit card might save you, if you make sure to pay the balance in full every month.

You can also think about part-time employment. For retirees born between January 2, 1943 and January 1, 1955, you can make any amount in earnings and keep your benefits, provided you have reached the full retirement age of 66. Think about starting a small business part-time: teach piano lessons, make and sell crafts, write for publications aimed at seniors.

For those of thus still facing the daily grind, this news offers a sad but teachable moment: make sure you’re fully funding your own retirement. Save all you can. Determine your financial goals and develop strategies to attain them. If you’re young and you aren’t saving, start now! Every expert points out that you will miss out on years of potential growth if you don’t start socking money away in your twenties. The more you wait, the more you’ll have to save down the road.  Don’t underestimate the power of finding the broker or bank with the most competitive rates but know that excessive fees will cut into your growth, so find the most competitive online discount brokers or mutual funds that suit your goals and save save save!

A simple question, with such a complicated answer. Just how much money do you need to retire?  The short answer is that you should certainly have enough in savings to bridge the gap between your retirement income and expenditures.

Trouble is, that it can get complicated pretty quickly. First, you’ll need to figure out an approximation of how you’ll spend each year you’re in retirement.  You’ve got to estimate how much you’ll make in retirement income, and then think about how those numbers will change due to inflation.

We’re going to simplify these with the “Rule of 25.” Essentially, we’ll figure out how much money you’ll need in your first year of retirement.  Then, multiply by 25.  Provided that your retirement nest egg isn’t stashed under the mattress, it will hopefully keep pace with inflation. (Some estimates call this a lofty goal, and suggest saving half this number and buying an annuity.)

First, let’s assume you’re a typical married American, in a household bringing home a reasonably average $80,000 per year. We’ll also assume you’ll take home a low amount of social security benefits, around $20,000 per year. (You can increase this number by staying on the job just a few more years.  If you decide to retire at the age of 70, your social security benefit can increase sharply … around 80%.

Now, we’ll take a second to estimate your income needs.  Despite what you might think, most people spend just as much during their retirement years.  Sure, you’ll spend less money commuting but you’ll also find yourself looking for ways to fill your time.  Chances are you’ll spend a bit more on travel or new hobbies. Most experts recommend planning to spend 75-85% of your pre-retirement expenses. In our scenario, you’re probably taking home about $60,000 after taxes. We’ll use a middle number, 80% of that, for $48,000. We’ll subtract your expected social security payments of $20,000, and arrive at an expected gap of $28,000. Multiply by 25, and arrive at your target of $700,000.

Because they’re becoming less abundant, we’ve assumed you won’t have a pension coming. But, if you government employee or otherwise expect a pension, make sure to subtract that number from your salary gap before determining your saving needs.

Now, all this assumes that you will more or less maintain the same lifestyle you are currently living.  But if you expect that lifestyle to shift, make sure to plan for it. If, for example, upon retirement you plan to move away from an expensive city, plan for lower expenses. Also, if moving means selling an expensive city home and buying a cheaper one somewhere else, plan for a nest egg that will get a sizeable bump when you trade your home for a less expensive one. If you plan on finally traveling the world over, plan for those expenses. Plan to spend money on your new-found passions: ballroom dance lessons, fly fishing, online poker, whatever might fill your time. Finally, however much money you need, and however young you are, don’t let it stop you from saving today!

I just received my Social Security Statement in the mail and thought it would be a good time to cover this important document. Mailed once a year to workers and former workers 25 and older, a Social Security Statement provides information that can help you plan for retirement. It also provides information about disability and death benefits that many don’t realize they have through Social Security.

A Quick Tour of the Social Security Statement

The Social Security Statement provides two important pieces of information. First, it provides a history of taxed social security earnings. In my case, it goes all the way back to my sophomore year in high school when I earned $673! Social security benefits are based on your earnings, so the accuracy of this information is critical.

Second, the Social Security Administration provides an estimate of your retirement, disability and death benefits. Social Security actually provides three different estimates of retirement benefits–your benefits at your full retirement age, at age 70, and at age 62. Your full retirement age depends on when you were born. For those born in 1960 or later, full retirement age is 67. It can be as low as 65 if you were born in 1937 or earlier. You can, however, begin receiving retirement benefits as earlier as 62, but the amount of your benefits will be reduced. Wait until age 70, and your monthly benefit increases.

The statement also provides an estimate of benefits should you become disabled and death benefits for your family should you die. You can also estimate your retirement benefits online at the Social Security Administration’s website.

What to do with Your Social Security Statement

When you receive your annual statement, there are a couple of things to take note of:

• First, the benefit estimates in your Statement can help you plan for retirement.
• Second, check your statement for the reported earnings to make sure that there are no errors. If you find an error, you can contact the Social Security Administration at 1-800-772-1213. You should have your W-2 and tax return in hand when you make the call. When you review your statement, keep in mind that there is a limit to the amount of earnings subject to Social Security taxes each year. In 2009, for example, the limit was $106,800.

As final sobering thought, Social Security is heading toward insolvency. On the front page of every Social Security Statement you find the following:

In 2016 we will begin paying more in benefits than we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits. We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations.

For this reason, many do not factor social security benefits into retirement planning. While I suspect there will be some level of benefit when I retire in about 25 years, I take the conservative approach and exclude social security benefits from my planning. Either way, your Social Security Statement should still be checked for errors each year and used for retirement planning if you so choose.