Mastering the formulas maximizes your Social Security benefits

Most people just take the money and run, but if you want to get the most out of Social Security, you ought to think twice. If you're married, the decision isn't all about you.

Social Security choices grow out of the program's rules:

• You will be penalized for taking benefits early (before age 66 for many of us) and rewarded for taking them late (up to age 70).

• Married people have a choice of collecting either a spousal benefit or a benefit based on their own work records.

• At the death of the first spouse, the survivor gets to receive the larger of the two benefits.

The choices a married couple make are influenced by evaluating how long each spouse is expected to live. For a 65-year-old nonsmoking couple, the odds are about 50-50 that one of them will live to be at least 92.

Here are a few examples of how couples can maximize their benefits.

Each example assumes this is a first marriage for both, and assumes the full retirement age is 66, which is true for those born between 1943 and 1954. If that doesn't describe you, check the Social Security website (www.ssa.gov) to learn more. For simplicity in these examples, cost-of- living increases are not included.

CASE NO. 1

Both spouses, of similar ages, each earned benefits based on their own work records. At the full retirement age of 66, he has a $20,000 available benefit; she has a higher available benefit, $22,000.

The strategy

The spouse with the lower earned benefit starts collecting it at 66. The spouse with the higher benefit starts collecting the spousal benefit — later switching to his or her own higher benefit at 70.

How it works

Age 66: The husband starts collecting his earned benefit, $20,000. The wife, at that point, starts collecting the spousal benefit, $10,000 (50 percent of her husband's benefit, based on this example).

Age 70: The husband continues his maximum benefit, $20,000; but the wife can now collect her full available benefit, $29,040 (increased to 132 percent of her original benefit because she took advantage of the delayed retirement credit).

The survivor's benefit: $29,040.

By her giving up $12,000 in benefits for each year from age 66 to 70 ($48,000), the couple qualifies for the extra $7,040 a year in her benefit for as long as at least one of them is alive. The break-even figure, at which this strategy becomes better than having taken the full benefit at age 66: 6.8 years.

Note: You must wait until 66, the full retirement age, to apply for the spousal benefit for this strategy to work.

CASE NO. 2

Both spouses' ages are no more than a few years apart. At the full retirement age of 66, he has an available earned benefit of $22,000. She has a spousal benefit of $11,000 (limited or no earnings history).

The strategy

The spouse with the earned benefit files for Social Security at 66, the full retirement age — but suspends benefits until age 70. This allows the other spouse to start collecting spousal benefits.

How it works

Age 66: The husband collects no benefit. The wife collects her spousal benefit, $11,000.

Age 70: The husband begins collecting his benefit, which with the delayed retirement credit is now $29,040; the wife continues collecting her spousal benefit of $11,000.

The survivor's benefit: $29,040.

By him giving up $22,000 in benefits for each year from age 66 to 70 ($88,000), the couple qualified for the extra $7,040 a year for as long as at least one of them is alive. The break-even figure, at which this strategy becomes better than having taken the full benefit at age 66: 12.5 years.

Note: There is no extra credit for delaying spousal benefits past 66.

CASE NO. 3

The husband is much older or in poor health. At the full retirement age of 66, he has an available earned benefit of $22,000. She has a smaller benefit because of limited or no work history.

The strategy

The younger spouse collects the spousal benefit as early as possible, while the older spouse, with the higher benefit, waits until 70 to take advantage of the delayed retirement credit. The greater the age difference, the more beneficial it is for the older spouse to wait to collect.

How it works

Age 66: (wife is 58, in this example), no benefits collected.

Age 70: The husband begins collecting his benefit, which with the delayed retirement credit is now $29,040; the wife, now 62, collects her spousal benefit of $7,700 (35 percent of $22,000, his age 66 benefit).

The survivor's benefit: $29,040.

His benefit and the break-even on his benefit are the same as the husband's in Case No. 2. What's different in this case is that the wife is starting her benefit at age 62 instead of waiting until age 66. She should delay only if she is still working (earned-income limits apply if you are younger than 66) or if she expects her husband to still be alive when she turns 78, the break-even point for this strategy. He will be 86 when she is 78. His choice to delay benefits is a gift that will benefit her for the rest of her life.

BUT . . .

What if you can't get by without some income from Social Security? Take the smaller benefit first, and wait to earn as much as you can in deferred retirement credits on the larger benefit.

Helen Huntley is former St. Petersburg Times personal finance editor and currently a fee-only financial adviser with Holifield Huntley Financial Advisers in St. Petersburg (holifieldhuntley.com).

Mastering the formulas maximizes your Social Security benefits 05/24/11 [Last modified: Tuesday, May 24, 2011 5:30am]

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