Social Security Trade-Offs

Last year around this time I wrote a column on the best time to apply for Social Security retirement benefits. My advice boiled down to answering the following three questions:

• Are you still working?
• Do you need the money?
• How is your health (how long will you live)?

One thing I didn't address fully in that column was the considerations for married couples. Social Security decisions can be complicated for couples, because they can require a trade-off of one benefit to take advantage of another. There are age- and income-related issues that affect your entitlement to your own benefit as well as those of a spouse, former spouse or deceased spouse.

You can't receive both your own Social Security and a spousal benefit; generally, you'll get the higher of the payments that you are eligible for.

The first thing you have to know in weighing Social Security benefits options is your full retirement age for your own benefits (find it here) and widow's benefits (find it here). With that information in hand, let's look at what you should know about applying for your own retirement benefit or the benefit your spouse may have earned for you.

On Your Own

You can apply for your own Social Security retirement benefit as early as age 62 for a permanently reduced benefit or as late as 70 for delayed retirement credits. Keep in mind that not only will an early application affect your benefit, but it also can affect the value of a benefit paid to your surviving spouse.

If one spouse has contributed far less to Social Security than the other, the spouse with the higher wages and longer career ideally should wait longer to claim benefits -- at least until full retirement age. Then if the higher-earning spouse dies first, the survivor can claim the spouse's full benefit, or even delayed retirement credits.

For someone who stopped working at 62 and had an unreduced Social Security benefit of $1,000 payable at age 66, the value of the benefit could range from $750 a month at 62 to $1,320 at 70.

You are eligible for delayed retirement credits if you put off applying for Social Security until beyond your full retirement age. Delayed credits will be included in a widow's benefit if you die before your spouse, but not in a spousal benefit payable while you and your spouse are still living. Here's more information on delayed retirement credits. Spousal benefits paid while you and your spouse are living are based on the full retirement benefit and the age of the spouse who is applying. For example, if Susan is older than her husband John, she can apply for 50 percent of John's unreduced Social Security when she is 66 (her full retirement age), even if John applied for a reduced benefit based on his own work record when he was 64 1/2. On the other hand, if Susan is younger than her full retirement age, she would be entitled to less than half her husband's Social Security retirement benefit.

If you continue working past 62, your Social Security retirement benefit can be affected by additional wages that may replace lower wages at the beginning of your career. Continuing to work and delaying Social Security retirement is one way to increase the amount of your monthly benefit and the benefit that may be payable to a surviving spouse. But keep in mind there's an earnings limit that will reduce your Social Security benefit if you are under your full retirement age. For 2011 that limit is $14,160. For every $2 you earn over that amount, your Social Security benefit is reduced by $1). Here's a fact sheet on the Social Security Earnings Limit.

What if you're retired by 62, but don't need your Social Security benefit to pay your bills? Claiming early benefits to add to an already comfortable annual income may not make much sense. Even if you took all the money and invested it, your investments would have to earn more than 7 percent annually to equal what you'd make by delaying benefits until full retirement age. And keep in mind that up to 85 percent of your Social Security benefit will be subject to federal income tax. On Your Spouse's Record

To apply for a benefit based on your spouse's work record, he or she has to be eligible and receiving a benefit. (If the spouse is older than the full retirement age, he or she can file and suspend the benefit in order for you to begin receiving spousal benefits). Benefits paid to you based on your spouse's work record will not decrease his or her retirement benefit. Here's more information on applying on a spouse or divorced spouse's work record.

Your spouse can receive as much as 50 percent of your full benefit (without the delayed retirement credits) depending on the age he or she applies for Social Security. For example, if your spouse applies for a reduced benefit at 62, he or she will not receive half your benefit if they for spousal benefits when at full retirement age.

If you decide to receive a widow's benefit prior to your full Social Security retirement age, be sure to discuss your options for applying for your own earned retirement benefit with the Social Security representative at the time of your application. A widow's benefit can be payable as early as age 60, and at any age if you are caring for young children. You may choose to switch to your own earned benefit at a later date if that is more advantageous to you financially.

If you're eligible for benefits based on the work record of your former spouse or deceased former spouse, your former spouse must be eligible for benefits, but does not need to have applied for benefits. Here's more information about payment of benefits as a former spouse.

Your spouse and dependent children might be eligible for benefits on your work record when you apply. Here's more information on benefits payable to your dependents.

If you are at your full Social Security retirement age, you can file and suspend your application for your own Social Security benefit in order for your spouse to claim a benefit on your work record. This cannot be done if you are under the full retirement age.

For some couples, the spouse who stayed home to raise the children may have a smaller Social Security benefit. It might make sense for the spouse with the smaller benefit to start collecting at 62 (either his or her own or a spousal benefit) and for the spouse with the larger benefit to wait to receive his or her own benefit. This is because a future widow's benefit will be based on the higher Social Security benefit amount.

Other Considerations

If you are receiving a Civil Service Retirement System benefit your Social Security benefit may be reduced by the Windfall Elimination Provision. Here's an online calculator to help you see the impact of the provision.

Likewise, with a CSRS retirement, your entitlement to spousal and widow's benefits may be severely affected by the Government Pension Offset. Here's an online calculator for the GPO. Finally, here are a couple of overall calculators to help you decide what's best for you:

• AARP Social Security Benefits Calculator
• Maximize My Social Security (This one costs $40.)

If you try either of these calculators, use the comments section below to let other readers know if they were useful to you.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Mondays at 10 a.m. EDT on federalnewsradio.com, or on WFED AM 1500 in the Washington-metro area.