What You Need to Know About Social Security

By Laura Cohn, Kiplinger’s Personal Finance

1. Patience pays off. The longer you wait, the bigger the check. You can start collecting Social Security as early as age 62. If you do, however, you could suffer a reduction in benefits of 25% or more for the rest of your life. And if you continue to work, you could run up against the earnings cap, which in 2010 dings you $1 in benefits for every $2 you earn over $14,160. But wait until your normal retirement age of 66 (for those born between 1943 and 1954; older for those born later) to collect and you can earn as much as you want without trimming your benefits. Plus, that larger first check becomes the basis for future cost-of-living adjustments.

2. Marriage has its perks. Couples have the most flexibility. Say your husband’s lifetime earnings are much higher than yours. You’re ready to start collecting benefits based on his record, but your husband is not ready to retire. The solution: Once he reaches his normal retirement age, he can file and suspend, meaning that you can collect your share while he waits to collect benefits until later, when they will be worth more.

If you have comparable incomes, however, there’s a little-known strategy that can boost your total household benefits. Say your wife wants to stop working but you don’t. She can claim benefits based on her record. If you are at least 66, you can claim spousal benefits only on her record and put off collecting your own Social Security until age 70, when you qualify for the maximum payout.

3. But you can collect if you decouple. You may be able to collect on your former spouse’s benefits, as long as you were married for at least ten years and are 62 or older. (If you remarry, however, you can’t collect retirement benefits based on your first spouse’s record – unless your second trip to the altar ends in divorce, annulment or death.) If your ex-spouse dies, you’re entitled to a monthly survivor benefit (even if he or she remarried) equal to 100% of what your ex received during his or her lifetime – assuming it’s higher than your benefit. You can even collect your ex’s survivor benefits if you remarry, as long as you waited at least until age 60 before you walked down the aisle again.

4. Bide your time. Get a bonus. If you wait until age 70 you can collect even more, thanks to the delayed-retirement credit, which is worth 8% a year. Say your normal retirement age is 66 and at that age you’d collect $1,000 a month. If you wait until you’re a septuagenarian, your check would grow to $1,320 – a full 32% more. If you retired four years early, at 62, your monthly payment would be just $750. With average life expectancies at an all-time high, chances are good you’ll be around to enjoy the higher benefits.

5. Ask for a do-over. If you started collecting Social Security and wish you had waited in order to get a higher benefit, you can press the reset button. Honest. You’ll need to pay back what you’ve received – which could be $100,000 or more – but the government won’t charge you interest. And the taxes you paid? You can request a refund. Essentially, this strategy allows you to take an interest-free loan from the government. Once you repay, Uncle Sam will restart your benefits at the new, higher rate. But it pays to stay in good health because it could take eight to ten years to recoup your investment.

Reprinted with permission. All Contents © 2010 The Kiplinger Washington Editors