These seven bold strategies can help you supercharge your savings and realize your dreams.By Mary Beth Franklin
3. More than half of retirees choose to take reduced social security benefits as soon as they are eligible at age 62. But for some that may be a $100,000 mistake, says Steven Silbiger, author of Retire Early? Make the Smart Choices (HarperCollins, $19.95). He notes that people who take early-retirement benefits -- which can be reduced by as much as 30% compared with full benefits at the normal retirement age -- and who continue to work could lose $1 in benefits for every $2 they earn over $12,000 this year. Plus, they may end up paying higher taxes because up to 85% of social security benefits are subject to federal and sometimes state taxes once income exceeds $34,000 for individuals and $44,000 for married couples filing jointly.
Women are particularly vulnerable to the long-term impact of reduced benefits. Silbiger estimates that a woman with a projected full benefit of $955 per month in 2005 who took social security at 62 and continued to work could lose $100,000 over her lifetime if she lived to 83, the average life expectancy. If she lived an additional ten years, she could lose $200,000. (Once you reach your full retirement age, however, social security will recalculate your monthly payment upward to take into account the benefits you forfeit to the earnings cap.)
Bonnie O'Donnell, 60, had considered taking early benefits. But after consulting with a Social Security Administration representative, she decided to wait until her full retirement age of 66. "I was stunned at how low my benefits would be at 62," says O'Donnell, of West Chester, Pa., who found out she was entitled to only $710 per month. If she waits until she turns 66, she will get $949, an increase of $239 per month, for the rest of her life. In O'Donnell's case, if she elected to take early benefits and work full-time for four more years -- which she must do to qualify for her state-government pension -- she would lose all of her social security benefits to the earnings cap. Once you reach full retirement age -- 65 and 6 months for those born in 1940, gradually rising to 67 for those born in 1960 and later -- you can earn as much as you like without jeopardizing social security benefits.
To O'Donnell, the choice is a no-brainer. "If you don't have any health problems and you like your job," she says, "why not keep working? Besides, there is no one to play with yet. I'll have to wait until my friends get a little older."
When looking for retirement help, start with an understanding of the fundamentals. Retirement help begins with the basics of maximizing benefits.
Social security retirement benefits are based on your highest 35 years of earnings. Like many women, O'Donnell was out of the workforce for a while -- 14 years, when she was raising her three daughters -- which lowered her average lifetime earnings. But because she was married to her former husband for more than ten years, she qualifies for spousal benefits, so her monthly check will be slightly higher than if it were based solely on her work record. Plus, if her income in her final years of work boosts her average lifetime earnings, her benefit will also increase.
In 2009, after 20 years of service, O'Donnell will qualify for a $1,000-a-month state pension, with regular cost-of-living adjustments and subsidized retiree health benefits. She also becomes eligible for medicare when she turns 65 that year.
Part of her retirement plan is to give up her big house in the Philadelphia suburbs -- and all the home-maintenance chores and expenses -- and rent an apartment close to her married daughters. "I want to be able to lock the door and go travel with my friends," she says. She also hopes to rent a place in Florida for a few months each winter.
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