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Boosting monthly income

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I am single, work for the state of Maryland, and some of my family members are living into their 90s. I will soon be 65. I'll be eligible to receive a Social Security disbursement of $1,670 per month at 66 and think that taking this while working until 68-plus will help to pay off a 4.5 percent home loan earlier than 2014, the current term. I have IRA accounts worth $350,000 and emergency funds to last about 1 1/2 years. How do I determine if I should purchase years of service from my state pension plan? If I used $97,000 to purchase 10 years of service, I would receive a full pension of about $1,300 per month (up from about $400 a month currently) and could continue to participate in the employees' health plan. (The current rate, with Medicare, would be about $40 per month.) I have a variable annuity with a surrender value of about $36,000 that could be used toward the purchase.

- K.C.

Buying the years of service is probably a good idea, said Paul Pullin, a financial planner with Fusion Financial Planning in Lothian.

Think of it this way: How big an income stream would the $97,000 give you if you used it to purchase an immediate, fixed annuity?

You could boost your monthly income to about the same level by purchasing an immediate annuity with the money, Pullin said, but the state plan adds the significant bonus of the health benefits. If the state plan offers cost-of-living adjustments, that's another plus over an annuity, he said.

Still, you should think about the timing of your retirement decisions. It's laudable to pay off your mortgage early, but Pullin said the better course may be to maximize the benefits from your desire to work longer. Working while collecting Social Security benefits can result in higher taxes, and delaying collection would boost your ultimate payout, Pullin said.

"I strongly recommend she stop paying additional principal on her mortgage," Pullin said. "Her need for funds outside her retirement account, in addition to her very low mortgage interest rate, make additional payments inadvisable. If her situation changes in a few years, she can always pay it down then." Meanwhile, accumulating as much money as possible in the next few years to put toward the purchase of those service years will mean fewer dollars that would have to come out of your IRA, Pullin said. A large distribution could throw you into a higher tax bracket, and you'll owe taxes on the withdrawals at your ordinary income rate.

Pullin suggested having a professional who does not sell annuities evaluate some alternatives to your variable annuity. You indicated the cash value of your annuity is well below your initial purchase price. Your surrender-charge period should be over, and the money in the annuity could probably be doing more for you than it is, he said.

My wife and I are 61. She is retired, and I plan to work until 65. We have 401(k) savings of $900,000 and owe $160,000 on our home. I earn $140,000 a year. Should my wife begin taking Social Security at 62? She would be eligible for $700 per month. Would this be wise? What would the tax ramifications be?

- J.M.

Although it is often best to hold out for higher payments later, this is a case when it may be wise for your wife to take the money, said Michael Kitces, director of financial planning for Pinnacle Advisory Group in Columbia.

"By starting benefits early, your wife can begin receiving income to supplement your cash flow or save for the future," Kitces said. "When you retire, your spouse may even be eligible to receive a higher Social Security payment as a spousal benefit based on your earnings. Either way, your delayed higher Social Security payment will become her survivor's benefit in the event you pass away." This hinges on your wife staying retired, of course, because income above $13,560 before normal retirement age will cut her benefits, he said.

You will owe taxes on a portion of her benefits because your income exceeds $32,000. Kitces figures you will have to report 85 percent of her benefits as income on your tax return and will owe some taxes on that amount.

For other Social Security strategies, check out Kitces' discussion at

Janet Kidd Stewart writes for Tribune Media Services.

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