Boomers' eagerness to retire could cost them

Married couples with $32,000 in combined income face taxes on half their Social Security benefits.

Couples with a combined income of at least $44,000 could owe taxes on 85% of their benefits. (For the purposes of the tax, combined income includes half of a retiree's Social Security benefits, wages from a job, pensions and withdrawals from most retirement plans.)

The phenomenon has been termed a "tax torpedo." Yet for some retirees, it will more closely resemble an intercontinental ballistic missile. "People are going to be walloped," Mahaney says.

How can retirees avoid this nightmare? By using their retirement savings to pay living costs in the early years of retirement, Mahaney says, and then taking their Social Security benefits later.

Those who do so will give up some tax-deferred investment gains. But in the long run, Mahaney says, it'll pay off: "It makes no sense to be creating more and more (tax-deferred) dollars that are going to be taxed at higher and higher rates."

To illustrate, Carlson and Mahaney compared two hypothetical retired couples. Both have pretax income of $69,000. But the first couple has Social Security income of $24,000 and IRA income of $45,000. The second has $39,000 in Social Security income and $30,000 from an IRA.

Both couples will pay taxes on their Social Security benefits. But because the first couple has a larger IRA withdrawal, a bigger slice of their benefits will be taxed.

The result: The first couple will pay more than $8,900 in federal and state taxes. The second couple? Only about $4,700.

A bird in the hand

Despite the lure of larger benefits, many retirees can't resist passing up the opportunity to file at 62, in part because they're worried about the future of Social Security.

Eddie Papps, 61, an independent contractor who has lived all over the USA and is currently working in Sarajevo, Bosnia-Herzegovina, plans to retire next year. He and his wife will receive small pensions.

Papps also has savings from his 401(k) plan. Papps says he doesn't really need Social Security income. But he plans to start taking his benefits next year anyway, just to be safe.

He says he thinks Congress will act to shore up Social Security, perhaps by cutting future benefits. But he believes those cuts won't affect people already receiving benefits. Therefore, "I'm not going to take a chance by waiting until I'm 65."

Robert Little, 61, a systems analyst in Philadelphia, feels the same way. He plans to retire from his full-time job this year so he can volunteer at the Philadelphia Zoo and spend time with his grandchildren. And he plans to file for Social Security this year, even though he knows his benefits will be reduced.

"No matter who gets in the next (presidential) administration, they're going to be attacking Social Security," he says.

"It's better to be on the rolls, because there's less of a likelihood they'll do damage to those already getting it."

Unless Congress acts, by 2017 Social Security will start paying out more in benefits than it receives in tax revenue.

By 2027, it will have to tap its trust fund to pay benefits. And by 2041, Social Security will be able to pay only about 75% of promised benefits, according to the agency's report to Congress.

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