Hard financial choices

| September 02, 2009

Say you’re 62 and, like the average owner-operator, with a working income of $51,000 averaged over enough years to qualify, you would be eligible for $1,050 a month now or $1,393 a month in 2013, at age 66.

As illustrated in the graph, if you start now, by the time you turn 66, you’ll have collected $50,400 in benefits. If you start at 66, you’ll need to live through age 78 and a half to make up for those missed benefits; beyond that, the higher payments would be to your advantage. (SS payments are taxable at varying levels depending on your income, which can skew these calculations a bit; if you want to do this precisely for your situation, take it into consideration and get with your accountant. Or visit ssa.gov/planners for some good calculators.)

The average male life expectancy is 81, according to the Social Security Administration. For women, it’s 84.

If you’re healthy and can continue working, it’s probably best to wait. “It isn’t a hard and fast rule,” says ATBS’ Miller. “It’s a personal value decision.” Balancing your needs with those of your spouse, as well as evaluating your life expectancy, will likewise figure into your decision.

Traditional IRA or Roth IRA?
A contribution to a traditional Individual Retirement Account has the benefit of avoiding income tax in the year the money was earned, as well as during the years the investment appreciates, but it is taxed when you take the money out. A Roth IRA contribution offers the opposite scenario: tax due for the year it was earned, but no tax later.

Assuming equivalent returns on a traditional IRA and a Roth IRA, the Roth is generally the better choice after all taxes are paid. For the traditional IRA to produce a better yield, you would have to determine how much you saved by deferring taxes each year and then invest all of it, getting a rate of return generally above 5 percent.

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