Social Security simplified

It is unfortunate that Social Security has become such a political football. With all of the biased talk in the press, many people mistakenly think that the system is incredibly complex or even unworkable.

Not so. In fact, the Social Security Administration (SSA) works incredibly well. "We really encourage people to use our Web site" (http://www.socialsecurity.gov or http://www.ssa.gov), says public affairs specialist Elena Stonebraker. "It's user-friendly, it has a search engine and contact information, and everything you need is there." If you prefer curling up with a good book, download The Social Security Handbook (http://www.ssa.gov/OP_Home/handbook/ssa-hbk.htm).

What you need to know

If you are a typical boomer, then the question uppermost in your mind may be: When can I retire? Can understanding your Social Security benefits help you decide? Absolutely. However, keep in mind that, for most people, these benefits represent only about 40 percent of their average pre-retirement income. Social Security alone should not drive your retirement plans. Do some financial planning - on your own or with a professional - to determine how much money you will need to live on during retirement and where it will come from. Look at these Eons articles by Norm Langlois for starters: "The Social Security Decision", "How Can I Estimate My Retirement Lifestyle Cost?", and "Beyond Social Security".

You can begin collecting your Social Security benefits at age 62. As you may have read, the benefits you receive at that age will be substantially smaller than if you were to wait until full retirement age (FRA) - 66 for people born between 1943 and 1954 (see Retire Chart). The longer you delay, the larger your monthly check will be.

However, according to the SSA "For most people, the total amount of lifetime benefits you receive is about the same" whenever you elect to take them. If you are the type of person who would take lottery winnings as a lump sum, then you'll probably want to go for early benefits. See Socialsecurity.gov to determine your break-even point.

Below is more specific advice about what you should know and what to do about your Social Security benefits, based on your age group.

(Note: This article won't cover disability benefits. They play by their own set of rules.)

Ages 50-55: Check your status

You can get a retirement profile from the SSA any time, in case you've lost the ones that are mailed to you annually. Read it and make sure there are no mistakes. Since it's based on assumptions about your earnings that may have changed, you should recheck it periodically and do your own calculations.

The amount you've earned isn't as important as the length of time you've worked and contributed to the fund. You get one credit for every $1,000 you've contributed (this number is adjusted periodically for inflation), but no more than four credits per year. To collect you need 40 credits, or 40 quarters. Benefits are based on an average of your top 35 years of Social Security earnings. If you did not work 35 years, the average may be lower. A good explanation is in the Socialsecurity.gov FAQ.

Then use the quick calculator. If you're 62 now, earn $50,000 a year, and accept the SSA's assumptions about your earnings history (you can change them), you'll get $1,029 a month if you retire at 62 and $1,438 if you wait until you reach your full retirement age at 66. If you earned $100,000, the numbers are $1,506 and $2,062, respectively. If you earned $9,999,999 -- the largest amount that the calculator can handle - your benefits will max out at $1,652 and $2,232, respectively. That is because payroll deductions are made only on income up to $97,500; so payments are also effectively capped. However, as payments are indexed for inflation, you will get a yearly raise.

If you've spent most of your working life at a government entity that has its own pension fund and doesn't contribute to Social Security, your benefits may be minuscule. (More on this here.) This doesn't mean that you should resign as governor of your state and take a menial job in the private sector so that you can accumulate credits. However, it does mean that it's safe to leave your private- sector job and run for governor if you already have benefits in the bank.

If your spouse is still alive, you're entitled to half of his or her benefits if they're more than what you would get on your own - even if you are divorced. You must have been married for 10 years, and he or she must be eligible for benefits when you file. If you've been unhappily married for nine-odd years, then you may want to hang on a little longer before leaving. Multiple exes can collect, although a per-family limit might dampen the fortunes of, say, Larry King's or Elizabeth Taylor's former mates. However, this limit does not reduce benefits for the higher-earning spouse.

Widows and widowers can start to collect survivor benefits as early as age 60. If you elect to do this, however, your benefits will be permanently reduced from what it would have been if you'd started later, whether you continue with survivor benefits or switch to your own retirement benefits. Look for more details on these, and on disability benefits -- which play by their own set of rules -- here.

Ages 55-60: Decide when you want to retire

Again, your decision shouldn't depend on Social Security. If you expect to live on your benefits to any significant degree, early retirement shouldn't be on the table. You'll want to keep working as long as you can to accumulate more benefits.

So don't quit your day job. And don't sign up for Social Security while you're working close to full time. If you retire before your full retirement age, the SSA will deduct $1 of your benefits for each $2 you earn over $12,960 (numbers are adjusted annually for inflation).

After you reach your full retirement age, you can earn as much as you like without paying a penalty. However, if you started collecting early, your benefits won't go up; they'll continue at the reduced rate. Use the SSA calculators to figure your break-even point if you start benefits early versus beginning at your full retirement age or later.

Ages 61.5-62: Compile information and documents

"Two or three months is plenty to allow," Stonebraker says. Assemble originals of your birth certificate, marriage and divorce records if you're claiming spousal benefits, military discharge records, and tax information. If you don't get the paperwork done before your birthday, not to worry. You'll get your benefits retroactively.

The application process is painless. You can apply online, by phone at 1-800-772-1213, or in person at any local office. Online applications go to reps who contact you to tell you what documents you need. You can either mail them or walk them in, and they should be back within a week. To apply in person, make an appointment via the 800 number; then you won't have to take a number at the office and wait.

"They told me everything I needed to know in one phone call," says a woman who applied by phone when she was 62. "They found my ex-husband's work records even though I didn't know his Social Security number, and told me my own work history was better. They did break-even calculations for me. I had to send only my birth certificate, and I got it back right away," she explains. Not your stereotypical government agency.

If you decide to take benefits early, you can change your mind, too. Suppose that a year from now, someone offers you a $9.9 million-a-year job. Just notify your friendly SSA rep, who can arrange to temporarily suspend your benefits. When you either leave the job or reach full retirement age, the number of months during which you didn't collect benefits will be added onto your base, and your payments will be adjusted upward.

Full Retirement Age (more or less): Apply now

Once you reach full retirement age, it's almost a slam dunk to take benefits, since you won't be penalized for other earnings. But you still have the option of waiting longer. Your monthly benefits will increase with every year you wait.

Resources

Economic Policy Institute, "EPI Issue Guide: Social Security": Links to EPI publications on all facets of the program.

Legal Information Institute, Cornell Law School, "LII's Social Security Library": http://www.law.cornell.edu/socsec. Links to a comprehensive legal treatise, statutes, court decisions, SSA publications, and sites of non-governmental agencies that provide guidance.

The New York Times, "Times Topics: Social Security Administration": News, commentary, and archival articles.