How early Social Security payments affect you and your spouse

Q: My wife and I have been drawing Social Security for many years. But one thing puzzles me. Her employment record was brief, so she collects on the basis of my employment. This consistently is 45 percent of mine. I have been told by others that it should be 50 percent. Is that correct?
T.K., Chapel Hill, N.C.

A: The formula used to calculate your wife's Social Security payments relates to her age when she started receiving those benefits, says Neil J. McCarthy, a certified financial planner in Roswell, Ga.

Just as your benefits would be reduced if you started receiving them before age 65 (assuming you were born in 1937 or earlier), the Social Security Administration can cut your spouse's benefit by up to 25 percent of her 50 percent benefit, if she starts receiving benefits before 65. So her 45 percent benefit (a 5 percent reduction from the 50 percent) is one-fifth of the 25 percent benefit reduction she would have seen had she started getting benefits at age 62.

Her benefit is based on your full retirement benefit at 65, so if you started receiving benefits before 65, that will change the timing somewhat. But the concept remains the same.

Q: I only recently learned about Series I US savings bonds and on the surface they look very promising. Am I missing something here? What drawbacks might there be to steer me away from them?
A.W., Escondido, Calif

A: The main drawback to the I series is that you give up the chance to earn the high returns other investments sometimes provide, says Tom Adams, whose website, www.savings-bond-advisor.com, educates people on government securities. In exchange, he says, you have no risk of getting back less than you invested.

I bonds are sold by the US Treasury. They pay a fixed base-rate of interest, which doesn't change over the life of the bond, plus the current inflation rate, which is adjusted every six months. New I bonds issued through October have a fixed base rate of 1.4 percent.

Since inflation has historically run in the range of 2.5 percent to 4 percent, over the long haul these bonds should return 3.9 percent to 5.4 percent, says Mr. Adams.

In addition to low risk and inflation protection, savings bonds in general have tax features that add value for some investors.

Federal income tax is deferred until you cash the bond or it stops paying interest after 30 years. Over 30 years, the tax-deferral feature can add the equivalent of 0.5 to 2 percent to your annual yield, depending on your tax rate and how high inflation goes.

Most banks offer Savings Bonds, or you can open an online account directly with the Treasury at www.treasurydirect.gov.