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How to get the most money from Social Security

When and how you file determine your total benefits

Consumer Reports Money Adviser: June 2012

There’s widespread confusion about Social Security that could be costing retirees tens of thousands of dollars. When AARP recently surveyed people ages 52 to 70 who had not yet filed for Social Security, it found misunderstanding about the variety of benefits, the best time to claim them, and other key issues.

That’s not surprising given the complexity of the program and the many variables that can affect benefits. Here, we try to demystify Social Security, answer some common questions, and discuss how you can use the system to get the most money—legally.

It helps to understand how the Social Security Administration determines your monthly payments. Benefits are based on what you’re entitled to at your full retirement age, which differs by year of birth. If you were born before 1943, your full retirement age is 65. For people born between 1943 and 1954, it’s 66. For those born after 1954 but before 1960, the age goes up two months for every additional year. Those born in 1955 receive full benefits at age 66 and 2 months, for instance. For those born in 1960 and after, the age is 67.

The basic monthly benefit that Social Security calculates from earnings is called your primary insurance amount, which is what you’d get at full retirement age. To determine the amount of your monthly benefit, Social Security increases your primary insurance amount by a cost of living adjustment and reduces it by a certain percentage if you retire before reaching full retirement age. You need to have worked at least 10 years to qualify for retirement benefits.

Your family members can receive other types of benefits—for spouses and ex-spouses, dependent children and parents, and survivors—based on your primary insurance amount. If your relatives are eligible for more than one type of benefit, Social Security will usually limit total payments to between 150 and 180 percent of your own benefit payment. Following are some typical questions about filing for benefits.

 

Retirement benefits

Q: Does Social Security base the amount of my retirement benefit on my highest five years of earnings?

 

A: No. The program applies an “average wage index” to all your working years up to two years before benefit eligibility, then averages your income from your 35 highest-earning years. If you worked less than 35 years, Social Security includes those zero-income years in its average.

Q: What’s the advantage of waiting to file past my full retirement age?

 

A: For workers born in 1943 or later, waiting to file increases your monthly benefit by 8 percent a year until age 70. So waiting those four years boosts your benefit by 32 percent. You’ll earn “delayed retirement credits,” which are added back to your monthly benefit when you do file. Conversely, filing early reduces your benefit. If, say, your full retirement age is 66 and you file at 62, the age at which you’re first eligible for Social Security, your monthly benefit will be permanently reduced by 25 percent. (For those born in 1942 and turning 70 this year, the increase for waiting is 7.5 percent per year.)

Q: Will working after filing for Social Security reduce my monthly benefit?

 

A: If you file for benefits at full retirement age and continue working, Social Security will not reduce your monthly benefit. But if you file early (before full retirement age) and continue to work, your monthly benefit will be permanently reduced. And that amount will be further reduced if you earn more than the annual “earnings test,” or threshold, which is $14,460 in 2012. Until the year you reach full retirement age, Social Security withholds $1 for every $2 earned above the year’s threshold until you reach full retirement age. During the year you reach full retirement age, the ratio is $1 for every $3 earned above a new threshold ($38,880 in 2012) until full retirement age. At that time, your benefits will be increased to account for those months in which your benefits were withheld.

Q:
Will getting a monthly pension cause my Social Security to be reduced?

 

A: No, unless your pension is from a federal, state, local, or foreign government system where you did not pay U.S. Social Security taxes. In that case, your monthly benefit will be reduced by two-thirds of your government pension. (For more information, check out Windfall Elimination Provision on the Social Security website.

Spousal benefits

Q: What are the eligibility requirements for a spousal benefit?

 

A: If you’re married for at least a year to someone who has filed for retirement benefits, you can file for a spousal benefit when you reach 62. The maximum spousal benefit is 50 percent of the worker’s full retirement benefit. If you’re eligible for a spousal benefit and your own retirement benefit, you’ll get the larger of the two amounts. Same-sex couples are not eligible for spousal or widow/widower benefits because the federal government does not recognize same-sex marriages.

Q: Is there a downside to filing for my spousal benefit before I reach full retirement age?

 

A: Your spousal benefit will be permanently lower if you file early. If, say, a wife’s full retirement age is 66, filing for the spousal benefit at 62 reduces her spousal benefit by 35 percent of her husband’s primary insurance amount. (Only those caring for a child who’s younger than 16 or disabled can file early and get the full spousal benefit.) But your application for a spousal benefit won’t reduce what your spouse gets in retirement benefits.

Q
: If I initially filed early for a spousal benefit, can I switch to my own higher retirement benefit?

 

A: No. To switch, you must have originally filed for a spousal benefit at your full retirement age. And you can’t switch from your retirement benefit to a spousal benefit.

 

Q: Can I get a spousal benefit based on my ex-spouse’s earnings record?

 

A: Yes. You qualify if you’re 62 and were married to your ex-spouse for at least 10 years. You must be unmarried and not entitled to a benefit that equals or exceeds 50 percent of your ex-spouse’s full retirement benefit. In order for you to file for your spousal benefits before your ex files for retirement benefits, your ex must be at least 62, and you and your ex must have been divorced for at least two years.

Q:
Can my retirement benefit be reduced if my ex applies for spousal benefits based on my work record?

 

A: No. Neither your benefits nor those of a new spouse will be affected.

Widow and widower benefits

Q: Are benefits for widows and widowers different than those for others?

 

A: For one, if you’re a widow or widower you can begin getting Social Security benefits at age 60, or 50 if you were disabled before or within seven years of your spouse’s death. Also, the full retirement age for widows and widowers is somewhat different than for others collecting benefits on their own records. The ages are the same for people born before 1938 or between 1945 and 1954, but for other birth years, widows and widowers are entitled to full retirement benefits four months early.

Q: Do I have to have worked to claim those benefits?

 

A: No. You file based on your deceased spouse’s work record. And assuming you were born after 1928, taking such a benefit won’t affect the amount of your own retirement benefit. But taking it early—between age 60 and your full retirement age—will reduce your monthly benefit, just as it does with a spousal benefit. From age 62 on, you have a choice between the widow/widower benefit and your own retirement benefit.

Q:
What impact does filing early for retirement benefits have on my surviving spouse if I die?

 

A: The widow/widower benefit is based on what you received in retirement benefits. If you filed early—and received less per month as a result—your surviving spouse would receive that reduced amount, too. That’s another argument for waiting until full retirement age or later to claim your retirement benefit. Not only will you get more for yourself, but you’ll leave more for your surviving spouse.

How to 'reset' to a higher benefit

If you filed for Social Security early with reduced benefits and have since had a change of heart—or a positive change in fortune—you can “reset” your status by withdrawing from the program.

The step negates your current retirement benefits and makes you eligible to re-apply at a higher benefit level later. You must file Social Security Form 521, “Request for Withdrawal of Application,” and pay back the benefits you and your family members have received to date. (You won’t be charged interest or an inflation adjustment.) In the past you could withdraw at any time, multiple times. Rules now restrict withdrawal to one time, within 12 months of when you became entitled to benefits.

Filing options for married couples

Illustration: Keith Negley

Couples who coordinate retirement and spousal benefits can boost their income. Here are two ways to work the system:

Claim and suspend. File for benefits at full retirement age (for our purposes, 66), but ask to receive them later. Once you’ve filed, your spouse can get a spousal benefit equal to half of your retirement benefit. This works well when spouses’ benefits differ a lot.

Restricted application. Claim a spousal benefit at 66 if your spouse has already filed, and switch to your own benefit later. Brett Horowitz, a principal and wealth manager at Evensky & Katz, a financial-planning company in Coral Gables, Fla., tells of a couple using this strategy: The husband is eligible for a monthly benefit of $2,100 at 66, and the wife, $1,750. By restricting his application at 66, the husband gets a spousal benefit of $875, not including cost-of-living adjustments. When he switches to his own benefit at 70, it will be worth 32 percent more: $2,772 a month. In the meantime, he will have collected $42,000 in spousal benefits.

Several websites offer advice on how to determine your best strategy. AARP’s free Social Security Benefits Calculator (under Tools) shows results at different ages. It can only be used for one spouse at a time, but we got matching answers for both members of a couple. SocialSecurityChoices.com gives solutions tailored to a couple; it sent a free report to our e-mail address a few minutes after we filled out a simple form. The site offers more detailed advice, which we didn’t request, for $9.99. To use the sites, it helps to have a current estimate of your Social Security benefits. You can use a free calculator on the SSA site. Mailings of paper statements, postponed by budget constraints, resumed in February for workers age 60 and older. Mailings for younger workers are expected to resume later this year.

These strategies won’t appeal to people who need to start collecting at their earliest opportunity or those who think they won’t live long enough to break even. But unless your family history shows otherwise, assume you’ll live long and shoot for the highest possible inflation-adjusted benefit.

   

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