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6 key facts on Social Security

February 02, 2015

By Dan Rafter | Money Rates Columnist

Social Security

Here's a key number: 567. That's the number of possible ways to claim Social Security benefits, says Joshua Melberg, president of J.D. Melberg Financial in Tucson, Arizona.

That 567 figure applies to couples -- singles have it a bit simpler -- but it's still little wonder that so many people fail to maximize the money they receive from the U.S. Social Security Administration.

"The basic concept seems simple: You'll suffer a financial hit if you claim your Social Security benefits before you reach full retirement age and you'll get a reward if you turn on your benefits after full retirement age," Melberg says.

But Melberg says different people are in different situations.

"Waiting until you turn 70 to claim your benefits will provide the biggest monthly payment," Melberg says. "But that doesn't mean it's the right move for everyone. Unfortunately, most people are leaving money on the table."

Understanding your Social Security benefits can help you maximize the amount of money you receive during your retirement years.

Here are six facts you need to know before you begin claiming your Social Security benefits:

1. The Social Security Administration isn't going to run out of money

Andrew Weissman, senior vice president at RDM Financial Group in Westport, Connecticut, says that many people rush to take their Social Security benefits as early as they can because they believe that the government will run out of the money that they need to fund the program. Their theory? They better take the money when they can.

The truth, though, is less dire. Weissman says that if Congress doesn't do anything to overhaul Social Security -- such as boosting the amount of money that workers pay into the system or raising the retirement age -- the Social Security Administration by 2033 will only be able to pay out 75 percent of the payments that recipients are scheduled to receive.

This means that even in an implausible worst-case scenario, the recipients will still receive 75 percent of their benefits each month.

"You shouldn't use fear that the government will run out of money as an excuse to take your payments as early as possible," Weissman says. "People in Congress like to stay in Congress. They don't want to get voted out of office. It is extremely likely that they will do something before 2033 to make sure that they can fund Social Security payments."

2. Thirty-five is a magic number

The amount of money you'll receive each month depends on when you begin claiming your benefits. If you claim before your full retirement age, you'll receive less each month. If you wait until 70, you'll receive the largest monthly payment possible. That's common knowledge. But many recipients don't understand the math behind their benefits.

At its most basic, your monthly benefit is determined by a 35-year average of your covered wages, with each year's wages adjusted according to inflation. If you worked more than 35 years, though, the Social Security Administration will use your 35 highest-earning years to calculate your monthly benefits.

On the negative side, the administration will average in zeroes for every year less than 35 that you worked, something that will drag down the size of your monthly benefits. If you want the maximum monthly benefit, you'll need to work at least 35 years.

3. Your decisions can impact how much your spouse receives after you die

Robin Brewton, chief operations officer of Overland Park, Kansas-based Social Security Solutions, says that the rules for survivor benefits -- the benefits that widows or widowers receive after their spouses die -- are some of the most misunderstood because they are so complicated.

But here's a basic tip: If you want to make sure the surviving spouse receives the maximum amount of benefits each month, the spouse earning the most money -- and the highest amount of Social Security benefits -- should delay claiming benefits until reaching the age of 70.

That's because the surviving spouse always has a choice: Survivors can choose to receive either their own monthly benefits or the full amount of their departed spouse's, whichever is higher. The surviving spouse will receive the highest amount of money, then, if the highest-earner in the marriage waits as long as possible to claim benefits.

"I have seen so many widows who are in poverty late in life," Brewton says. "They thought they had enough, but then late in life their retirement savings start to run out. One way to not let this happen is to make sure that surviving spouses receive the highest monthly benefits possible."

4. Staying married for less than a decade can hurt you

You might want to get divorced. But if you've already been married eight or nine years, it may make financial sense to wait until 10 years to make end of your marriage final. That's because if you've been married at least 10 years, you can claim either your benefits or an amount equal to half of what your former spouse earned, whichever is higher.

But if you've only been married for nine years and 11 months? You don't get that option.

Of course, if you remarry, this option disappears. In fact, you won't be able to claim your new spouse's benefits, either, until you've been married for at least one year.

5. You won't lose your benefits if you keep working

Laurie Samay, client service associate with Scarsdale, New York-based Palisades Hudson Financial Group, says that many people think that they can't work and receive Social Security benefits at the same time. This isn't true, though the issue is a bit complicated.

If you are collecting benefits while under your full retirement age and still working, the government will withhold $1 in benefits for every $2 you earn past a certain yearly limit. For 2015, that annual limit was $15,720. If you begin collecting your benefits at full retirement age and continue to work, the government will withhold $1 of benefits for every $3 you earn past a higher threshold amount. In 2015, the withholding would start once you earn more than $41,880.

And, as Samay points out, you're not really losing those withheld benefits. Once you reach full retirement age, the government will increase your monthly benefits to make up for those that it withheld.

"So it's nothing to worry about," Samay says. "If you want to keep working in retirement, you can. Those benefits are just being deferred. They're not being taken away."

6. Waiting really can pay off, unless ...

Many people automatically begin claiming their Social Security benefits at full retirement age because it's so easy. They also don't think that the difference between claiming at, say, age 66 and 70 amounts to much money.

This is where they are wrong. For every year you wait to claim Social Security benefits, your yearly benefit will jump by about 8 percent until you reach age 70. So by waiting from age 66 to age 70 to claim your benefits, you can increase your eventual monthly payments by roughly one-third.

The caveat? If you're in poor health and may not make it much past retirement age, claiming your benefits sooner rather than later may still be the best choice for maximizing your overall payout.

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