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Social Security complexity can cost retirees thousands
YONKERS, N.Y. (5/29/12)--It's easy to get confused about calculating Social Security benefits. New evidence points to considerable lack of knowledge, which could cost retirees tens of thousands of dollars (Consumer Report Money Adviser June 2012).

AARP surveyed more than 2,000 adults ages 52 to 70 who have not yet filed for Social Security. The vast majority understood the basics: Monthly benefits are permanently reduced if you file as early as 62 and before your full retirement age, and delaying your claim by one year beyond your full retirement age increases your monthly benefit.

Few respondents understood important nuances of the program critical to using the system to get the most money--legally:

* The program uses highest-earning years--Social Security applies an average wage index to all your working years, up to two years before you're eligible for benefits, and averages your income from the 35 highest-earning years. If you didn't work 35 years, Social Security assigns a zero for nonworking years in its average. Check your statement to make sure all working years are recorded.

* The effect of working after filing depends on when you file--Social Security will not reduce your monthly benefit if you file for benefits at your full retirement age and continue working. You will experience a permanent benefit reduction if you file early and continue to work. And, that amount is further reduced if you earn more than the annual "earnings test" or threshold, which is $14,460 in 2012. Until the year you reach full retirement age, Social Security withholds $1 for every $2 you earn above the year's threshold until you reach full retirement age. During the year you reach full retirement age, the ratio is $1 for every $3 earned above a new threshold--$38,880 in 2012--until your full retirement age. At that time, your benefits will be increased to account for the months benefits were withheld. Very few survey respondents were aware that the "earnings test" reduction in benefits is temporary ( Feb. 2012).

* Your pension may affect your monthly benefit--Your monthly pension will not cause your Social Security benefits to be reduced, unless the pension is from a federal, state, local or foreign government system in which you did not pay U.S. Social Security taxes. In that case, expect your monthly Social Security benefit to be reduced. Visit and type "windfall elimination provision" in the search box for more information.

*You have the ability to "reset" to a higher benefit--If you filed early but have a change of heart or significant increase in income, you can withdraw from the program and start up at a higher benefit level later. You'll need to file Social Security Form 521, "Request for Withdrawal of Application," and also pay back all benefits you and your family members have received to date. You only can withdraw from the program once, within 12 months of when you became eligible for benefits.

Visit You can apply online for retirement or disability benefits, Medicare, or Supplemental Security Income; access your Social Security statement; estimate your retirement benefits; and check your application status online.

For more information, read "How to Calculate Retirement Needs" in the Home & Family Finance Resource Center.
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