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3 ways to plan for it

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By Janice Revell, Money Magazine senior writer

1. Set yourself up for tax-free income.

Your best defense against the coming entitlement tax grab is to generate as much retirement income as possible from sources that don't trigger the tax on Social Security benefits, or throw you over the Medicare means-testing threshold.

One way to accomplish this is to put at least some of your retirement money into a Roth IRA or Roth 401(k). With a traditional IRA or 401(k) you invest pretax dollars and pay taxes when you withdraw your money; with the Roth versions, you pay taxes on what you put in but nothing on your withdrawals.

And once you're retired, Roth withdrawals do not count as income when it comes to determining whether you'll owe taxes on your Social Security or have to pay higher Medicare premiums. "The Roth takes that issue off the table," says Roseland, N.J. accountant and planner Howard Hook.

What's more, a Roth also immunizes you from a rise in income tax rates. Now this doesn't mean Roths will always be the best tax move - for instance, you might fall into a lower tax bracket when you retire. Read here for more on how to use a Roth.

Paying down your mortgage can help too. If you sell your house and spend the proceeds, the IRS won't consider that income for Social Security taxation or Medicare means testing. Likewise, if you pay off your home and borrow against the equity in retirement, that won't get counted as income either.

2. Hedge against higher interest rates.

Of course, raising taxes and cutting benefits aren't exactly popular moves for any politician. They may just try to borrow their way out of the problem, says Laurence Kotlikoff, a Boston University economist who specializes in entitlements research.

But major credit rating agencies have already warned that the federal government's credit rating is at risk of being downgraded if the national debt is not brought under control. Borrowing more to pay for Medicare and Social Security would make this threat even more real. That means the government would have to pay higher interest rates on its debt.

Rising interest rates can hammer your portfolio returns, especially on bonds. And that's an argument for keeping your portfolio tilted to equities, even if you're close to retirement.

For example, at 30 you might aim for 75% in stocks and 25% in bonds. At 45 you'd shift to 70% in stocks, and at 60 you'd reduce your stock allocation to 60% of the portfolio.

3. Be realistic about saving and working.

Conventional wisdom holds that you can count on spending only 70% to 80% of your pre-retirement income in your golden years. After all, many of the big-ticket costs you incur during your working life, like commuting, contributing to your 401(k) account and paying off your mortgage, will disappear.

But taxes on your Social Security benefits and Medicare, combined with the likelihood of rising medical costs and possible benefit cuts, could easily outstrip those other savings.

To increase your odds of retiring well, start by assuming that you'll need 100% of your pre-retirement income to get you through your later years. To figure out how much you'll need to stash aside every year to get there, use our Retirement Planner calculator.

And if saving more is impossible, you may have to reconsider your retirement date. Working just one additional year increases your annual retirement income by 9%, on average, according to Urban Institute research. No, it's not a silver bullet - there simply isn't one. But every bit of ammunition will help.

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