Social Security: eight key things to know

Most of us know some basics about Social Security.

We understand retirees can start taking retirement benefits at age 62. We realize we'll get a bigger monthly check if we wait a few years more until our normal retirement age to tap benefits. And who hasn't heard thatSocial Security has a long-term financial problem that Congress needs to address?

"When you scratch beyond the surface, the knowledge really plummets," said Jean Setzfand, vice president of financial security for AARP, which recently polled older adults on their Social Security knowledge. "I don't blame people for not knowing and understanding the details. It can be really confusing."

So to boost your Social Security IQ, here are eight things you might not know about the program:

REWARD OF WAITING: Many workers don't realize just how much benefits can grow if you delay taking them.

For every year you postpone Social Security beyond your normal retirement age _ between 66 and 67 for those born in 1943 and after _ the annual benefit goes up by 8 percent until age 70. That's 32 percent more annually if a 66-year-old waits until 70 to claim benefits.

"Eight percent guaranteed is awfully good in any market environment," said Joe Lucey, an adviser and president of Secured Retirement Advisors in Minnesota.

"The biggest mistake people make is they don't understand the benefits of deferral," he said.

But financial firms do.

California-based Financial Engines provides 401(k) advice to workers, including how they can make their money last in retirement. In some cases, the company recommends that retirees accelerate 401(k) withdrawals in the early years of retirement if that's what it takes to postpone drawing on Social Security.

SPOUSAL BENEFIT: You can get a benefit based on your own work history. Or you could take a benefit based on your spouse's work record if that amount is higher.

If you take Social Security at your normal retirement age, the spousal benefit would be half the amount of your mate's full benefit.

Financial advisers recommend strategies that use a spousal benefit to boost income in later years.

Take the case of Eric and Hanah, a married couple at full retirement age. Let's assume that Eric is entitled to a bigger benefit _ and the one they will want to maximize by delaying benefits as long as possible. (Yes, women are making gains in the workforce, but they still tend to have smaller Social Security paychecks.)

To maximize his benefit, Eric can claim it now and immediately suspend it. This allows Hanah to apply for a spousal benefit on her husband's record. And the suspension means Eric's benefit can continue to grow as if he never took it, said Jason Scott, managing director of Financial Engines' Retiree Research Center.

But say Hanah's benefit based on her own employment history is larger than what she would receive under a spousal benefit. In that case, Scott said, she can file for benefits on her own record and Eric can take the spousal benefit. His own benefit keeps growing until he claims it, ideally at age 70.

SURVIVOR BENEFIT: When one spouse dies, the other continues to receive whichever of the two benefits is larger. Delaying one partner's benefit as long as possible will mean a bigger survivor benefit.

"Many times, people come in my office and they think of 'me' and not 'we,' " said Lucey, the adviser. "They think of their own benefit and forget the survivorship benefit that Social Security provides."

A surviving spouse typically lives an additional decade, Scott said, so maximizing this benefit can make a sizable improvement in his or her lifestyle.

AFTER DIVORCE: If your marriage lasted at least 10 years, you can receive benefits based on an ex's work history _ as long as you're unmarried now and that benefit is larger than you would get on your own.

And, unlike in other situations, you don't have to wait until your former spouse applies for benefits to take advantage of this, said Webster Phillips, senior legislative representative for the National Committee to Preserve Social Security & Medicare in Washington. You can receive benefits provided you and your ex are at least 62 and have been divorced for at least two years.

ON SECOND THOUGHT: Once you start taking Social Security benefits, you get one chance to change your mind and withdraw your application. You can reapply for benefits later.

The catch: You must withdraw the application generally within 12 months of getting benefits, and you must repay all the money received.

This can be helpful to older unemployed workers who start taking benefits early _ at a reduced amount _ and then land a job within a year, Phillips said.

"They may want to pay that money back and avoid a reduction," he said.

AN EARNINGS PENALTY THAT ISN'T: If you're still working and take Social Security before your normal retirement age, some benefits may be withheld.

The Social Security Administration deducts $1 of benefits for every $2 earned above $14,460. But for retirees turning 66 this year, the agency will withhold $1 for every $3 earned over $38,880 until the month of their birthday. At full retirement age, there's no reduction of benefits for working.

"A lot of people don't work because they think this is a tax and it's gone forever," said Steven Sass, associate director for the Center for Retirement Research at Boston College.

But the agency makes it up later. Once you reach full retirement age, Social Security will recalculate your monthly benefit and adjust it upward.

"It's just as if you deferred it," Scott said.

BENEFITS MAY BE TAXED: If income exceeds $34,000 if single, or $44,000 for joint filers, up to 85 percent ofSocial Security benefits will be subject to tax, said Rande Spiegelman, Charles Schwab's vice president of financial planning.

Income, in this case, includes interest from tax-free municipal bonds. That way, even wealthy seniors collecting $1 million in tax-free municipal bond interest will have their Social Security benefits taxed, Spiegelman said.

That's not a problem for most people. Nearly 70 percent of beneficiaries, according to the AARP, don't pay taxes on benefits.

THE VALUE: Many workers underestimate the value of Social Security and its cost-of-living adjustments.

The average combined benefit for a retired couple is $1,994 per month, Lucey said. That may not seem like much. But if they were to buy an annuity that paid a similar benefit _ also adjusted for inflation _ over 20 years, the cost would be $485,000, Lucey said.

And Social Security isn't just for retirees.

It provides benefits for young workers who are disabled or who die and leave behind a family, said Nancy Altman, co-director of the advocacy group Social Security Works.

For a 30-year-old earning $30,000 a year with a spouse and two young kids, Social Security is like having $465,000 in disability insurance and more than $475,000 in life insurance, she said.

"For most Americans, their largest asset is Social Security," Altman said.