10 Things You Must Know About Social Security

For many Americans, Social Security benefits are the bedrock of retirement income. Yet future retirees could find themselves on shaky ground. The Social Security Board of Trustees, in its latest annual report, estimated that the retirement program would only be able to pay out 75% of scheduled benefits starting in 2033, three years earlier than projected last year.

You can't control how the government might fix that problem. But you can educate yourself about Social Security to ensure that you claim the maximum amount of benefits to which you are entitled. Here are ten essentials you need to know.

It's an Age Thing
Your age when you collect Social Security has a big impact on the amount of money you ultimately get from the program. The key age to know is your full retirement age. For people born between 1943 and 1954, full retirement age is 66. It gradually climbs toward 67 if your birthday falls between 1955 and 1959. For those born in 1960 or later, full retirement age is 67. You can collect Social Security as soon as you turn 62, but taking benefits before full retirement age results in a permanent reduction of as much as 25% of your benefit.

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Besides avoiding a haircut, waiting until full retirement age to take benefits can open up a variety of claiming strategies for married couples. (More on those strategies later.) Age also comes into play with kids: Minor children of Social Security beneficiaries can be eligible for a benefit. Children up to age 18, or up to age 19 if they are full-time students who haven't graduated from high school, and disabled children older than 18 may be able to receive up to half of a parent's Social Security benefit.

How Benefits Are Factored
To be eligible for Social Security benefits, you must earn at least 40 "credits." You can earn up to four credits a year, so it takes ten years of work to qualify for Social Security. In 2012, you must earn $1,130 to get one Social Security work credit and $4,520 to get the maximum four credits for the year.

Your benefit is based on the 35 years in which you earned the most money. If you have fewer than 35 years of earnings, each year with no earnings will be factored in at zero. You can increase your benefit by replacing those zero years, say, by working longer, even if it's just part-time. But don't worry -- no low-earning year will replace a higher-earning year. The benefit isn't based on 35 consecutive years of work, but the highest-earning 35 years. So if you decide to phase into retirement by going part-time, you won't affect your benefit at all if you have 35 years of higher earnings. But if you make more money, your benefit will be adjusted upward, even if you are still working while taking your benefit.

There is a maximum benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2012, the maximum monthly benefit is $2,513. You can estimate your own benefit by using Social Security's online Retirement Estimator.

COLA Isn't Just a Soft Drink
One of the most attractive features of Social Security benefits is that every year the government adjusts the benefit for inflation. Known as a cost-of-living adjustment, or COLA, this inflation protection can help you keep up with rising living expenses during retirement. The COLA, which is automatic, is quite valuable; buying inflation protection on a private annuity can cost a pretty penny.

Because the COLA is calculated based on changes in a federal consumer price index, the size of the COLA depends largely on broad inflation levels determined by the government. For example, in 2009, beneficiaries received a generous COLA of 5.8%. But retirees learned a hard lesson in 2010 and 2011, when prices stagnated as a result of the recession. There was no COLA in either of those years. For 2012, the COLA came back at 3.6%. The COLA for the following year is announced in October.

The Extra Benefit of Being a Spouse
Marriage brings couples an advantage when it comes to Social Security. Namely, one spouse can take what's called a spousal benefit, worth up to 50% of the other spouse's benefit. Put simply, if your benefit is worth $2,000 but your spouse's is only worth $500, your spouse can switch to a spousal benefit worth $1,000 -- bringing in $500 more in income per month.

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The calculation changes, however, if benefits are claimed before full retirement age. If you claim your spousal benefit before your full retirement age, you won't get the full 50%. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.

Note that you cannot apply for a spousal benefit until your spouse has applied for his or her own benefit.

Income for Survivors
If your spouse dies before you, you can take a so-called survivor benefit. If you are at full retirement age, that benefit is worth 100% of what your spouse was receiving at the time of his or her death (or 100% of what your spouse would have been eligible to receive if he or she hadn't yet taken benefits). A widow or widower can start taking a survivor benefit at age 60, but the benefit will be reduced because it's taken before full retirement age.

If you remarry before age 60, you cannot get a survivor benefit. But if you remarry after age 60, you may be eligible to receive a survivor benefit based on your former spouse's earnings record. Eligible children can also receive a survivor benefit, worth up to 75% of the deceased's benefit.