To some people, Social Security is an arrangement set in stone. You (and your boss) are generally required to pay into the system pre-established amounts, based mostly on your earnings.

That lack of flexibility is also present when you get your benefits in retirement, because once you decide to initiate the payments, what you get is pretty much what you get.

But the "when" of taking your Social Security is up to you, within certain limits. And depending on your situation and longevity, the decision could make or cost you several hundred thousand dollars.

Here's how to determine the right time to take your Social Security payments in retirement.

Taking it sooner

The first age at which most recipients can initiate Social Security is 62, and you wouldn't be human if you weren't at least a little bit tempted to begin getting your money at the earliest possible date.

But your impatience could be expensive in the long run, especially when compared to waiting until "normal retirement age" (it's 66 if you were born from 1943 to 1954, progressing gradually up to 67 if you were born after 1960).

First, your payments will be lowered by 5/9 of 1% for each month prior to reaching full retirement age, up to 36 months. If you take Social Security more than 36 months before NRA, the reduction is 5/12 of 1% for each month over 36, and then 5/9 of 1% for each of the original 36 months.

That means a recipient scheduled to get $2,000 per month as a 66 year-old at normal retirement age would get $1,500 if he instead starts the payments at age 62.

And as an added injury to his income, if he earns any money while receiving the benefits before reaching NRA, he'll lose $1 in benefits for every $2 that his annual earnings exceed a certain amount ($14,160 in 2009, and how can anyone possibly be confused by all this?).

Waiting to take it

The advantage gained by postponing your benefits doesn't stop just because you've reached normal retirement age. For every year past NRA that you wait, your eventual monthly check will grow by 8%.

So the retiree who would get $2,000 per month at an NRA of 66 could get over $2,700 per month if he waits until age 70, which is the longest he could delay his payments.

Live longer and prosper

Sharp-eyed readers will point out that if the above-mentioned retiree waits until age 70 to get the greater monthly check, while waiting he will miss out on 48 monthly payments of at least $2,000, totaling $96,000.

So the question becomes, "How long do I have to live to make it worth my while to wait?" The answer depends on an individual's circumstances, but most scenarios point toward a breakeven age of around 78 or so.

That may seem to be far off in the distant future, but the Center for Disease Control says the average current life expectancy for a 66 year-old American male is about 82, and 85 for his female counterpart.

In which category are you?

Generally, you should take your Social Security payments sooner rather than later if you need the money to survive. Also, it should be considered by those who have poor health, or who have been made poorer by a decline in the stock market.

Delaying payment is probably smarter if you enjoy good health and better genes, don't necessarily need the money, or are still working into your sixties.

If given the choice between working more or retiring and taking Social Security, you're usually better staying on the job as long as you can stand it, as your benefits are based in part on your 35 highest years of earnings.

But whenever you decide to start taking Social Security, there are several strategies you can use to increase the amount you eventually receive.

You'll learn more about them next month. In the meantime, please know that the best way to the get the most from Social Security is to live a long life -- so take good care of yourself.

-- After graduating from the University of Wisconsin with a degree in economics and history in 1988, McKinley became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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There's more than a little irony to the fact that your eventual personal financial independence is so dependent on Social Security, a government program that enforces mandatory participation.

Another strange development in the Social Security saga is that it was once known as "The Third Rail" in politics because it was not to be "touched" on by intelligent politicians. Now it has become a magnet for partisans of every persuasion.

Not surprisingly, the increased debate over Social Security has inspired some twisting of the truth about the past, present, and future of the program. So it might be helpful to flesh out the difference between fact and fiction.

"Social Security is broke"

Right now, it isn't. In fact, over the almost 75-year cumulative existence of the program, Social Security has taken in much more money than it has paid out in benefits. Currently the surplus sits at about $2.4 trillion.

According to the latest report from the Social Security and Medicare Board of Trustees, that surplus is expected to continue for another eight years, until 2016.

The system will then cease to earn a surplus, but there is a projected interest amount that will be earned on the accumulated surplus that will prevent the extra money from being tapped until 2025.

After that date, the surplus will be drained over the next fourteen years, until 2037. Then, projected benefits would have to be reduced to about 75% of what they were expected to be.

In other words, in about thirty years, if you were expecting to get $2,000 per month, you would instead get $1,500 per month. The money would go directly from workers to retirees, with no accumulating surplus.

"Then everything's okay"

Well, not really. And you shouldn't necessarily be comforted by the notion that a "pay-as-you-go" Social Security system might be able to fund a majority of projected retiree benefits three decades from now.

Notice that the word "projected" appears several times in the discussion above. The actual figures will be much more dependent on how will the U.S. economy does over the coming decades.

The reason is that high unemployment is a double-whammy to the health of the Social Security system. First, "less workers working" means less people are paying in to the program.

And people laid off in their early sixties who would otherwise prefer to be working might be forced to tap the benefits sooner than they would otherwise prefer.

Finally, even "comfortable" retirees could decide to draw their benefits prematurely because of decimated investment portfolios and/or drastically-lowered income from the low rates paid on conservative, interest-bearing securities.

"At least I'll keep what I'm paid"

In theory and regardless of the amount, once your Social Security check lands in your checking account, the money is yours to spend as you please.

But partly in response to past Social Security mini-crises, several provisions have been enacted that could cause you to net out much less than the amount of the check.

First, you'll get dinged if you initiate your benefits before reaching "normal" retirement age—66 years old for those born after 1943, and 67 years old if you were born after 1960.

Second, taking Social Security before normal retirement age can also cause you to lose benefits if you also have earned income during that period. For 2009, for every $2 over $14,160 you earn annually will reduce your benefit by $1.

Third, Social Security income is technically tax-free to retirees. Unless, that is, your adjusted gross income in retirement, added to your tax-free interest and half of your Social Security, exceeds $25,000 for singles ($32,000 for married couples).

Then half of your benefits are taxed at your top marginal rate. If the formula figure exceeds $34,000 for singles ($44,000 for married couples), 85% of your benefits will be subject to income tax.

These levels, by the way, were instituted in 1983, and have never been adjusted upward for inflation. A cynic would say that the bureaucrats knew full well that without adjusting the amounts, more and more recipients would get snared by the formula, and end paying income taxes on their benefits.

But cheer up. Next month you'll learn when you should take Social Security payments, and what you should do before you initiate the checks to ensure you get the maximum possible amount.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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Contrary to the belief of some sensible savers and investors, now could be a good time to take out a new, 30-year fixed-rate mortgage on your current home, and then pay the loan off as slowly as possible.

The macroeconomic motivation for this maneuver is that today's unprecedented low interest rates may lead to higher inflation tomorrow, which would bring higher interest rates the day after that (figuratively speaking).

The microeconomic reason for doing this is that the new mortgage could not only help you benefit from higher inflation and interest rates, but free up money that serve you better over both the short- and long-terms.

Conventional uses

Regular readers of this column will recall that last month's version detailed some sensible answer to the question, "What would I do with the money from my mortgage?"

Whether it's a lump sum or a lower monthly payment, any extra money could be used to pay down higher-interest debt, sock it away in savings to wait for higher interest rates, or ramp up contributions to at-work retirement plans.

But there are other less-conventional but still potentially beneficial ways to put your extra savings to work.

Buying off Uncle Sam

If you're eligible, a relatively reliable "investment" idea for your mortgage proceeds would be to use some or all of the money to pay the taxes on converting some or all of your IRA to a Roth IRA.

To do so, your adjusted gross income for 2009 has to be less than $100,000 (but that amount doesn't include what you convert). Next year the income limitation is scheduled to disappear completely.

There is a definite advantage paying taxes on your IRA withdrawal while the balance is low, and the likelihood of higher tax rates in the future is high.

But even if you convert your IRA to a Roth IRA now and it turns out to be too soon, you have at least until April 15th of the next year to undo the conversion, and perhaps October 15th of 2010 if you choose to file an extension.

Investing in long-term care

If you like the idea of getting taxes on your retirement plan out of the way while asset values and tax rates are relatively low, you'll love the idea of paying a little right now for a potentially-devastating expense down the road.

By definition, heading off to a nursing home or assisted living facility isn't "fun." It's even less so if you or a loved one don't have the money to pay for the quality of care you or a loved one want and need.

So using your mortgage proceeds or savings from a new, lower payment to purchase a long-term care insurance policy could protect you and your family from losing your home, not to mention the rest of your hard-earned assets.

However, whether your mortgage savings come via a big lump sum or a little more money each month, due to the ever-changing nature of both long-term care and long-term care insurance, it's probably best to purchase the insurance by paying monthly premiums, rather than forking over a lump sum up front.

Higher education costs

Even if you're comfortable that your savings, retirement, and long-term care needs are covered, if you have a child or grandchild you're well aware that the cost of sending that kid to college is going in one direction (up), while the amount of money available to pay for it is going in another direction (not up).

So it may behoove your family to consider putting your extra cash in a college savings plan, also known as a 529 account. You won't get much of a tax deduction on the deposit, but the earnings left in the plan are sheltered from taxation.

Withdrawals that are used for qualified higher education expenses are tax-free, and the parent or grandparent can maintain control over the account and the withdrawals.

And if the child in question doesn't need the money, it can still be transferred to use for another family member.

The only downside of the 529 account is that you will owe taxes and a small penalty on the earnings portion of the account if you choose to use the proceeds for non-qualified purposes.

For example, cashing it out to pay off your mortgage.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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Last month's column encouraged homeowners with good credit and a good chunk of equity built up in their homes to at least consider taking out a new, 30-year fixed-rate mortgage at today's record-low rates. The result might be a large sum of money, a smaller monthly payment, or both.

The reasoning behind this proposition is that the same economic measures that have produced these low rates may also bring about higher inflation, and subsequently higher interest rates.

If that occurs, those who borrow now will not only be repaying their mortgages with dollars that are declining in value (a good thing for the borrower), but can also use the proceeds from the new loan to ensure that they never have to borrow money at higher rates in the future.

But the key factor in making this work is what you choose to do with the proceeds of the new loan, or the extra money you get from lowering your monthly payment. Here are the best places to salt away any extra savings.

Pay off other debt

If you've accumulated some debt via credit cards, car loans, or student loans, you're probably paying a higher interest rate on those debts than you would be paying on a new 30-year mortgage.

Unlike the credit cards, the interest rate on a fixed-rate mortgage can't be raised at the whim of the lender. And unlike just about all other debt, the interest on your mortgage might be tax-deductible, rendering the net cost of the mortgage even lower than the stated rate.

Even if your only debt is an outstanding balance on a home equity loan or home equity line of credit, you're probably going to be able to cut your interest rate by rolling the old loans into a new fixed-rate mortgage.

Best of all, whether you get a lump sum of cash or a lower monthly payment from the new mortgage, you can stash the savings and use it to pay cash for future purchases for which you otherwise would have had to borrow money at a higher, non-deductible interest rate.

Stay at the bank

If you're a little apprehensive about pulling equity out of your home when you don't necessarily have to, then perhaps you shouldn't venture too far from the financial institution that gives you the loan in the first place.

Depositing the money in a certificate of deposit or two will keep the money relatively-readily accessible if you need it in an emergency, or decide to pay the mortgage off sooner than scheduled.

The only drawback is that the rate you earn on the CDs may be a couple of percentage points below what you're paying on the mortgage—a relatively small price to pay for the increased liquidity you've achieved.

And that rate disadvantage may not last forever. If that higher inflation and interest rate scenario comes to fruition, you may be able to renew those CDs at higher interest rates than what you are paying on the mortgage (and if this happens, try not to gloat in front of your banker).

A retirement boost

Of course, there's an even better place to get an immediate, higher rate of return on the money, especially if you winced a little when you opened your most recent retirement plan statement.

Raising your at-work retirement plan contribution to the maximum amount allowed (in 2009, it's the lesser of your earnings or $16,500, $22,000 if you're over 50) may benefit you in two ways.

First, you get an automatic reduction in this year's tax bill, usually from $200 to $400 for every extra $1,000 you are able to set aside. Then, your earnings are sheltered from taxation until you retire.

Finally, equity prices might shock everyone and actually rise at some point during the next several decades, which may help you earn a rate of return equal to or higher than what you are paying on your new mortgage.

But it might be prudent to keep your retirement plan investment allocation at a moderate mix of stocks, bonds, and cash, just in case it takes awhile for a new bull market to begin.

Next month, some slightly less conventional destinations for your mortgage proceeds.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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The first half of the last decade caused many homeowners around the country to believe that there would never be a better long-term investment than owning a home.

In the last five years or so the same group is wondering whether their respective homes will ever sell for the prices seen at the peak of the boom, or even for what the tax assessor seems to believe the houses are worth right now.

If it makes you feel any better, recent developments have made it more likely that your house will be worth much more in the future -- just not in a way that will make you feel any better about it.

Here's why, and what you should do now to improve your odds of making more money on your most precious "investment."

Some help from Uncle Sam

A few weeks ago the Federal Open Market Committee announced plans to purchase hundreds of billions of dollars of Treasury and mortgage-backed securities.

In the short term, one of the effects of this move was that long-term interest rates dropped to lows never seen before -- especially on 30-year home mortgages.

The financing giant Freddie Mac said that the 4.85 percent rate available nationally on 30-year loans was the lowest since they began tracking it almost forty years ago.

Low rates = higher inflation?

The larger and longer economic affect of this flood of money into the markets is uncertain. But a probable outcome is that we'll see higher inflation at some point in the future.

That means that dollars will continue to decline in value (meaning that in the future it will require more dollars to buy a certain set of goods and services than it would to buy the same set today).

So the home you own today might be worth more dollars in the future, but those dollars will be worth less (and hopefully not worthless).

In other words, if you sold your home today, the proceeds might allow you to buy more goods and services now than if you sold your home in the future -- even if the dollar amount of the future sale is much higher than what you could sell your home for today.

Whipping inflation then

Another reason that you may not see large, long-term increases in home prices is that when the Federal Reserve tries to slow or halt inflation, the primary tool they use is raising interest rates.

Although this move is usually effective in eventually slowing inflation, it also tends to put the brakes on the economy, which tends to put the brakes on rising home prices.

To make matters worse for homeowners hoping for increasing home prices, rising interest rates also means higher mortgage rates, which, all other things being equal, likely means lower home prices, as well.

What you can do

There are a couple of strategies some investors use to hedge against the prospects of inflation, including the purchase of gold or other precious metals, or buying into a mutual fund that trades in commodities or natural resources.

But one of the simplest ways to partially protect yourself against the ravages of inflation could also be one of the smartest.

How? By taking advantage of the aforementioned record-low mortgage rates to refinance your home mortgage, or even take out a new one.

It's certainly not a move for everyone. But if you are one of the relatively few, and the inflationary scenario comes true, in a few years you'll find yourself making mortgage payments that are technically for the same fixed dollar amount, yet in reality those dollars will be worth less and less as time goes on.

Meanwhile, the cash that you receive from your home equity today can be used to improve your money situation now, as well as provide a cushion against inflation and other future financial calamities.

But what you do with those proceeds is very important. Next month you'll find out if you should even consider opening up a new 30-year mortgage, and, if you do, what your best bets will be with the money you receive.

In the meantime, you may want to make an appointment with a friendly lender at a local bank or credit union.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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Usually the days around April 15th are the last time you would want to consider sending even more money to Uncle Sam than you otherwise already owe.

But now may be a great time to convert your IRA to a Roth IRA. Yes, you'll incur taxes on the converted amount now. Yet the long-term gain of such a move could far exceed the short-term tax pain you might pay today.

The conversion

The IRS allows IRA owners to convert some or all of the IRAs to Roth IRAs at any time, with two main restrictions. The first is that the money converted will be taxed as ordinary income (but with no other penalties, regardless of age).

The second is that your adjusted gross income must be less than $100,000 in the year in which you make the conversion. That limit is the same whether you file single or married-jointly, but doesn't include the converted amount.

So if your income is below the limit, and you're in an overall tax bracket of 25%, converting $10,000 of your IRA will cost you an extra $2,500 in taxes, usually due by the April 15th of the year after you make your conversion.

"More taxes? Count me in!"

Okay, the prospect of a bigger tax bill today doesn't sound that appealing. But keep in mind that the taxes you pay now could be the last taxes you or ever pay on the converted amount.

The savings could be substantial. Say your $100,000 unconverted IRA grows at a hypothetical annual rate of 8% per year over the next twenty years, after which you will retire and withdraw the balance over the twenty years after that.

If you're in the same 25% tax bracket during retirement and you don't convert now, you would pay $200,000 in taxes on the amount during retirement, versus the $25,000 you pay to convert it to a Roth IRA right now.

Plus, Roth IRAs hold several advantages over IRAs during retirement, including no mandatory distribution age, as well as the fact that Roth IRA withdrawals not increasing taxation on Social Security payments.

Why now

Two factors make this an ideal time to consider converting an IRA to a Roth IRA. The first one is that since your IRA account value is likely to be on the low side right now, any taxes paid on a converted amount will also be lower than what they otherwise might be.

The second reason to do it today is if you think that you will be in a higher tax bracket during retirement than you are when you make the conversion.

Now, most people are usually in the same or lower bracket in retirement, so a conversion may not make sense while you're still working.

But can you imagine a scenario where state and federal governments raise the tax rates in the future, snaring your retirement income with a higher rate? I can, too—pretty easily, in fact.

Who should do it

So besides an income that falls under the $100,000 limit, optimism that retirement account values will be higher in the future, and pessimism that your tax rates will be as well, there is one other requirement that should be in place before you consider conversion.

Ideally, you will have enough money outside of your IRA to pay the extra tax bill, so that you won't have to take more out of the IRA just to pay the taxes—which requires incurring more taxes, so you then have to take more out of the IRA, and so on.

Sooner rather than later

Even if you meet all the qualifications described above, you may still be hesitant to make the conversion now, seeing that your IRA account values (and therefore, the taxable amounts) might go lower still in the near future.

The IRS provides some good news along those lines, because if you make the conversion now and a subsequent drop in values makes you wish you had waited, you have up until April 15th of next year (2010) to "recharacterize" the conversion at the new, lower value (with a new, lower tax bill).

The window for the "do-over" can even be extended to October 15th

of 2010, if you're willing to file for an extension. But you do only get one chance at another chance to recharacterize the conversion.

So it's usually best to make the switch now, and hope that prices rise and never come back. But if you're wrong, at least you'll get a chance to hedge against the uncertainty of the markets.

What you will know for sure, is that you're done paying taxes on whatever amounts you convert.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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If the recent decline in your retirement plan savings accounts isn't enough to keep you up at night, try the following:

Income tax rates are likely to go higher while you're working, and remain there during your retirement. Social Security will be there for you in some form, but a good portion of that will be subject to those aforementioned taxes.

The simple solution to these problems is to just save more money for retirement. But that's easier written than done, especially if you're already maxing out your retirement contributions, or are concerned that you might need some of that money in an emergency.

Here's how a Roth IRA can defeat your retirement nightmares in one swoop—without necessarily locking up you money until you're (even) older and grayer.

Background

As you may know, for the 2008 tax year full Roth IRA contributions can be made by anybody with earned income, and whose adjusted gross income is under $159,000 for married couples filing jointly ($101,000 for singles).

The maximum contribution is the lesser of your earnings, or $5,000 ($6,000 if you're over 50). Spouses without earned income can make similar contributions based on their partners' earnings.

There is no immediate tax deduction on deposits to Roth IRAs. But future earnings in the account are sheltered from taxes, and then withdrawals taken after age 59_ are tax free.

What you didn't know (or perhaps forgot)

In return for foregoing an upfront tax break, you receive a nifty benefit when using a Roth IRA: all contributions can be withdrawn at any time, for any reason, with no taxes or penalties whatsoever.

The good people at the IRS let you designate your withdrawal as the "contribution" portion of the account, until you've used up the amount you've deposited.

So if want to save for retirement, but are worried that you might need that money before you turn 59 1/2, you can take comfort in knowing that a large portion of your Roth IRA can be withdrawn at a moment's notice, and with no taxes or penalties.

Or, the Roth IRA can do double-duty saving for both retirement and college. If your retirement accounts are more than fully-funded when your kid graduates from high school, the contribution portion of the Roth IRA can be used to pay for higher education—again, free from penalties and taxes.

No taxes on Social Security

Social Security payments received in retirement are ostensibly tax-free. That is, unless you receive just a modest amount from other sources like interest, earnings, or IRA withdrawals (see www.ssa.gov for the figures).

Then either 50% or 85% of your Social Security income is taxable, and at your highest rate. But Roth IRA withdrawals are one of the few sources of income that aren't counted when determining if your Social Security payments are taxable.

So a retiree can theoretically pull a million dollars out of his Roth IRA in a single year, and as long as he has no other income other than Social Security, his federal tax bill will be zero.

You decide when to take the money

The IRS requires you to begin withdrawing (and paying taxes on) money from your IRA after you turn 70 1/2, and the percentage required to be withdrawn rises for as long as you live.

But Roth IRAs have no mandatory distribution age. So not only will you avoid taxes on any withdrawals, but you can take the money out when it suits you best—if you take it out at all.

Act now

For 2008's tax year, Roth IRA contributions have to be made by this April 15th—so don't sleep on getting money in the accounts while you can. And while you're at it, make a contribution for 2009, as well.

And if you think the Roth IRA is the solution to your retirement anxiety, wait until next month, when you'll find out why now is a great time to consider converting some or all of your IRA to a Roth IRA.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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