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Archive for Tuesday, June 20, 2006

New job, lower wage can cut Social Security payoff

June 20, 2006

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Q: I am 53 and have been paying into Social Security for 30 years. I am thinking of a career change that would reduce my salary by about two-thirds, to about $35,000 a year. How would this affect my Social Security?

A: Benefit calculations are quite complicated, so there's no quick and easy answer. Benefits are based on your average monthly earnings for the 35 years during which you made the most.

Assuming you were born in 1953, you can begin receiving a full Social Security Benefit when you turn 66, or 13 years from now. Obviously, if you stay with your high-paying job, you'd have 13 more years of that big salary to use in the 35-year calculation. Reducing your pay now is bound to reduce your benefit somewhat.

For a rough sense, I played with a benefits calculator, using some of my own income numbers for the past 30 years and some future estimates based on the situation reduced about 7.5 percent.

The Social Security Administration has several calculators on its Web site: www.ssa.gov. You'll need to know your "taxed Social Security earnings" for your entire working life. They are printed on the Social Security statement you should be receiving a few months before your birthday every year.

Q: How much money can my husband and I draw out of our IRAs once we turn 59 1/2?

A: There's no limit. But keep two things in mind.

First, those withdrawals are taxed as income. So set aside part of the withdrawal to pay the tax. And, if possible, avoid taking so much that you move up to a higher tax bracket.

Second, tax-favored accounts such as IRAs and 401(k)s should be left alone as long as possible, so you get more years of tax-free compounding. In a traditional IRA, you will have to start taking money out after you turn 70 1/2, though Roth IRAs have no such requirement. Tables for figuring these "required minimum distributions" are in IRS Publication 590 at www.irs.gov

Michelle Singletary's "Color of Money" column will return July 6.

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