To maximize retirement benefits, know the rules

NEW YORK Wed Jan 18, 2012 2:37pm EST

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NEW YORK (Reuters) - When the oldest baby boomers start turning 66 this year, they'll be eligible to file for full Social Security benefits. But pollsters say many Americans plan to work well past that age, reflecting tough economic times and a general desire to reshape the idea of retirement.

What will working longer mean for the Social Security benefits of these seniors? How about Medicare, which has filing rules that are closely linked to those of Social Security and employment status?

These are important questions for a large portion of the U.S. population; about 10,000 seniors will turn 66 every day over the next 20 years. Social Security and Medicare both have detailed rules governing the interplay of work and benefits, and making the right decisions make a difference of thousands of dollars in enhanced Social Security benefits or the Medicare premiums that you pay.

I'll be looking at how work and entitlement benefits are intertwined in two columns, starting today with Social Security.

Social Security's rules encourage seniors to keep working at least until the Full Retirement Age (FRA) of 66. You can work and receive full benefits starting at that age. You can start receiving Social Security as young as 62, but if you're working, $1 will be deducted from benefit payments for every $2 earned over $14,640. Although this is often described as a penalty, the withheld benefits are added back to your benefits, after you reach 66, using a complex actuarial formula.

Social Security offers another important incentive to forestall filing until at least 66. Benefits are reduced permanently for every year that you file before the FRA, and increased for every year that you wait to file beyond it, up till the age of 70.

That's intended to keep the program actuarially fair, paying roughly equal lifetime benefits to everyone in the program. But delaying does deliver a major boost to monthly income - and it serves as an inducement to work longer and wait to receive benefits.

For example, filing at 62 means you retired four years early, and the net effect is a permanent reduction in annual benefits of 25 percent. On the other hand, if you wait until age 70, your annual benefit will be 32 percent higher than if you started at age 66.

Married couples can coordinate these decisions to boost benefits through smart navigation of Social Security's survivor and spousal benefits rules.

The survivor rules permit widows to receive up to 100 percent of a deceased spouse's benefit or her own benefit, whichever is greater; the spousal rules permit receiving the greater of her own benefit or up to half of a living spouse's benefit.

The survivor rule has a very simple implication for retirement timing decisions: couples usually benefit when the spouse with the higher lifetime earning history (which translates into a bigger Social Security check) delays filing.

That's most often the man - and men can expect their wives to outlive them. A delayed filing by the higher-earning husband usually sets the stage for the widow to receive a higher benefit down the road, after his death.

But that doesn't mean couples must forego Social Security entirely while the husband delays filing, notes Jim Blankenship, a financial planner in New Berlin, Illinois and author of "A Social Security Owner's Manual: Your Guide to Social Security Retirement, Dependent's, and Survivor's Benefits" (here).

Blankenship suggests that the lower-earning spouse files for her own benefit at 62, receiving the lower rate, or at her FRA. When the higher-earning spouse files to receive the increased, delayed benefits, the spouse is eligible to shift to the spousal benefit (again, based on half of the spouse's benefit) in situations where that makes sense.

"That brings in some benefits while the higher-earning spouse - usually the husband - keeps working and earning credits toward a higher benefit," he says.

Blankenship takes it one step further: He suggests that the higher-earning spouse files for a spousal benefit while he waits to file for his own benefits.

"It's not a lot of money in most cases, but it is money you're entitled to and should receive," he says.

Another perfectly kosher maneuver is known as a "file and suspend." Let's say the higher-earning husband wants to continue delaying taking benefits past his FRA in order to keep accruing credits. But the lower-earning wife would like to file for spousal benefits on the husband's record.

Here's how the "file-and-suspend" works:

1. The higher-earning spouse files for benefits at his FRA but immediately files a notice to suspend benefits.

2. The lower-earning spouse elects to receive spousal benefits

3. The higher-earning spouse continues to accrue higher payments for whatever point he elects to begin receiving benefits.

For more on the ins and outs of filing for benefits , see my guide to Social Security basics ( here) and an FAQ on spousal and survivor benefits (here).

In a future column, I'll take a look at how Medicare's filing rules and how they interact with employer-based benefits.

(Editing by Bernadette Baum)

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