Social Security: When and how to receive benefits

Q. I am approaching retirement and need to make some decisions relative to the timing of my Social Security benefits. What factors should be considered?

Full retirement benefits are available only upon reaching normal retirement age, which for 2006 is age 65 and 8 months. Reduced early benefits are available at any time after age 62.

Keep in mind that there are issues associated with taking Social Security benefits while you are still working, even if you are entitled to them. The maximum amount that persons who have not reached full retirement may earn in any single year and still receive Social Security benefits is limited. If you are under the full retirement age when you begin receiving benefits, $1 of benefits will be deducted for each $2 you earn above the annual limit of $12,480. If you wait until "normal" retirement age, you will lose $1 of benefits for each $3 earned above $33,240 for just that year. After normal retirement age, there is no reduction of benefits, regardless of the amount of earned income.

However, there may be taxes due on benefits if your earned income during retirement, as well as investment income, exceeds certain levels. Married couples filing jointly with provisional income (defined as adjusted gross income, plus non-taxable interest, plus half of your Social Security benefits) may have to pay tax on up to 50% of their Social Security benefits. Provisional income in excess of $44,000 increases the potential tax on Social Security benefits up to 85%.

Spousal benefits also appear to be a source of some confusion. At retirement, married individuals are entitled to three types of benefits: a benefit based solely on their own earnings, a reduced amount based on a working spouse's benefit, or a survivor's benefit. The reduction amount is dependent on when the older person reaches normal retirement age.

For example, for those born between 1943 and 1954, the normal retirement age is 66 years old. A 62-year-old spouse can receive 35% of the other spouse's unreduced benefit. Keep in mind that no spousal benefit is payable until the retiree begins to receive their benefits.