September 13, 2013

Christine Fahlund Chris Fahlund, Ph.D., CFP®, is a senior financial planner and vice president of T. Rowe Price Investment Services.

Last spring, T. Rowe Price launched an easy-to-use, free online tool (Social Security Benefits Evaluator, troweprice.com/socialsecurity) designed to help investors and their financial advisors evaluate and choose strategies for taking Social Security benefits based on their personal goals. In addition, T. Rowe Price financial planners conducted Social Security webinars across the country.

Both the tool and the webinars generated scores of questions as investors sought to find out how best to approach taking Social Security benefits. The evaluator receives about 20,000 visitors a month.

We recently asked Chris Fahlund, Ph.D., CFP®, a senior financial planner at T. Rowe Price, to respond to seven of the most common questions that site visitors are asking. "Many people don't realize they can customize how they take Social Security to meet widely varying goals," Fahlund says. "Using Social Security strategically, as part of an overall retirement income plan, can have a great impact on the annual and cumulative incomes that spouses may receive during their lives together or as a survivor."

Q. What's the most effective way for a married couple to take Social Security benefits to maximize the survivor benefit and also receive income early?

A. If you need income as soon as possible, one strategy to follow is for the lower-earning spouse to file for a reduced benefit at age 62 on that individual's work record and the higher-earning spouse to wait until age 70 for maximum benefits based on the higher earner's own work history. When the first spouse dies, the surviving spouse can opt to receive the larger of the two spouse's benefits for the remainder of retirement.

To test this strategy and others, visit: Social Security Benefits Evaluator, troweprice.com/socialsecurity.

Q. How does Social Security incorporate work history into the calculation of my benefit?

A. The Social Security Administration bases the size of benefit payments on the top 35 "covered earnings" years (i.e., years you have paid into the system through payroll taxes), adjusted (indexed) for inflation. Higher lifetime earnings result in higher benefits, up to a maximum. (In 2013, at full retirement age (FRA), that monthly benefit is $2,533, and at age 70, it is $3,350.)

For more information, see: Understanding the Benefits, ssa.gov/pubs/EN-05-10024.pdf.

Q. I'm divorced. Am I eligible for spousal benefits based on my ex-spouse's work  history?

A. Both ex-spouses may be eligible to claim "spousal" benefits simultaneously based on their former spouse's work history (spouses can't do this if they are still married to each other). But there are specific eligibility requirements. The ex-spouses must have been married for at least 10 years and divorced for at least two years. The spouse taking benefits must be at least age 62 and unmarried when filing.

For more information, see: "Retirement Planner: If You Are Divorced," socialsecurity.gov/retire2/divspouse.htm.

Spousal Benefit Calculator: socialsecurity.gov/OACT/quickcalc/spouse.html#calculator.

Q. If my spouse or ex-spouse dies before filing for benefits based on his or her own work history, how does that affect my widow(er)'s survivor's  benefit?

A. If your spouse dies prior to his or her FRA and had not yet filed for benefits, generally the surviving spouse would be eligible for up to 100% of the benefit the deceased spouse would have received at his or her FRA. If the spouse dies after his or her FRA and had not yet filed for benefits, the surviving spouse would be eligible for the benefit amount the deceased would have been eligible for on the date of death, which would be more than the FRA amount.

For more information, visit: Survivors Benefits, socialsecurity.gov/pubs/EN-05-10084.pdf.

Q. If I work past 62, why should I wait to delay benefits until I reach full retirement age?

A. It's generally a good idea to avoid collecting Social Security benefits at least until you reach your FRA, which is age 66 or older for most baby boomers. Until then, if you file early, the Social Security Administration will temporarily deduct $1 from the benefits you receive for every $2 you earn above the annual wage limit. (In 2013, the limit is $15,120.) In the months of the year prior to reaching your FRA, a slightly different formula applies. Beginning at full retirement age, your annual benefits increase to account for any benefits temporarily withheld, and there is no limit on how much you can earn without any temporary reduction in Social Security benefits. Each spouse is treated individually for purposes of the test (i.e., if you are no longer working but your spouse is, your Social Security benefits prior to your FRA will not be reduced).

Use this calculator to estimate the amount of your Social Security benefit that may be temporarily withheld until your FRA: ssa.gov/OACT/COLA/RTeffect.html.

Q. Are my Social Security benefits taxable?

A. Yes. Up to 85% of your Social Security may be included in your taxable income. However, at least 15% of your benefits are always income tax-free federally, and in many states all benefits are income tax-free.

For additional information, see: socialsecurity.gov/planners/taxes.htm.

Q. If I delay taking benefits until 70, how long before I break even versus taking benefits early?

A. For most people the breakeven age should not be a driver of a strategy for taking Social Security benefits. Since a couple age 65 has about a one in four chance that one spouse will live until age 95,* chances are that one spouse is likely to outlive all the breakevens and is likely to need the guaranteed, inflation-adjusted income Social Security benefits provide.

*socialsecurity.gov/planners/lifeexpectancy.htm

For more information, see: T. Rowe Price Investor, June 2013, "Projecting Your Social Security Benefits,"

This material has been prepared by T. Rowe Price Associates, Inc., for informational purposes only. This material does not constitute investment advice and should not be exclusively relied upon. Investors will need to consider their own circumstances before making an investment decision.

T. Rowe Price Associates, Inc., its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.