Photo by alan(ator)

Yahoo! Finance recently published a guide to the five most common questions about Social Security benefits.  You can read the original article by clicking on the following link:

What You Need to Know About Social Security

Given all of the doubt that the entitlement program will survive when I reach retirement age, should I count on it as part of my retirement income?

You should. In fact, Social Security provides 50% of the income for more than half of married retired couples and about 20% for high earners. Moreover, it’s the only source of income you’re likely to have that’s guaranteed to last for life and keep pace with inflation.

OK, they’ve got my attention.  I hope that I’ll fall into that high-earner category.  But 20% is nothing to sneeze at.  Let’s take a peek at the guide:

QUESTION 1: Can I count on Social Security to be there?

You can. Despite what you may hear about the system going broke, the funds from workers’ payroll taxes will cover all retirees’ payments until 2016 even if no changes are made to the current program. After that the Social Security Administration can cover full benefits until 2037 by cashing in its Treasury bonds from the Social Security trust fund. And when the bonds run out, income from payroll taxes would be enough to cover about 75% of payments for decades.

That said, the government is looking at ways to shore up the system. President Obama has talked about imposing Social Security payroll taxes on income over $200,000 (currently, earnings over $106,800 are exempt). Other possible fixes: upping payroll taxes, raising the retirement age, and scaling back payments in some way.

The good news for anyone in or near retirement: “People 55 and over are likely to see no change or just a marginal change in benefits,” says actuary Bruce Schobel, who worked on the commission headed by Alan Greenspan nearly 30 years ago that fixed the system (at least until now). But even younger workers can rest assured that drastic cuts are unlikely.

In 2016, I’ll still be working, and for a long while after that.  I’m not comfortable with the liquidation of Treasury bonds to meet current obligations.  And it looks like I’ll never hit the magic exemption level if they keep raising the threshold.

QUESTION 2: How much will I get every month?

Like all things Social Security, there’s a complex formula involved. But essentially, the amount you’ll get at your full retirement age is based on your average lifetime earnings, adjusted for rising wage levels over the years. Depending on when you were born, your full retirement age varies between 65 and 67. Grab your payments earlier than your full retirement age, and they’ll be reduced: Wait, and you’ll get more.

Spouses can also qualify for up to 50% of their husband or wife’s full retirement age payment; if that amount is larger than what you would get based on your own earnings, you’ll get the higher figure. Similarly, if your spouse dies, you would receive a survivor’s benefit of up to 100% of what your deceased spouse was collecting, if that amount is higher than your own payment. Divorced? You may still be eligible for spouse and survivor benefits as well.

Your checks are also automatically adjusted for inflation each January. Payments increased by 5.8% for 2009. But given the near-term inflation outlook, the Congressional Budget Office estimates there may not be a cost of living increase for the next few years.

Because I won’t retire for a long while (read my review of Die Broke), I’m not worried about COLAs.  I have more to worry about just getting a raise each year.  My cost of living isn’t taken into account.  I’m also not planning for a traditional retirement; I actually like going to work.  It gives me a reason to get up each day.  So, I’ll probably let my benefits marinate, and draw a larger number later on.

QUESTION 3: At what age should I begin collecting?

The majority of people take Social Security before full retirement age. But it often pays to wait. Just in terms of benefits accrued, if you have an average life expectancy or better, you’d probably come out ahead waiting for a larger payment that you won’t collect as long. More important, you’ll have a bigger check at an age when your retirement savings are diminished and you aren’t likely to be able to work to supplement your income.

The math gets more complicated for married couples, however, since in addition to what they get from their own earnings, one of them may also qualify for spousal benefits and eventually collect payments as a surviving spouse. So married couples should aim to max out their benefits over both their lifetimes.

Generally, the best strategy is for the higher-earning spouse to delay taking Social Security for as long as possible. That’s because survivor benefits are based on the larger of the couple’s checks. The lower-earner, meanwhile, should usually claim benefits earlier. That will often, though not always, provide the greatest amount of income as well as security in old age.

Like I mentioned in the last comment, I plan on waiting to collect my benefits.  That could change, but that’s the game plan for now.  Being the higher-earning spouse, my wife will claim her benefits earlier.

QUESTION 4: Will I lose benefits if I work?

It’s true that if you collect early and work at the same time, your payments may be reduced (once you reach full retirement age, feel free to toil away; your golf game might suffer, but there’s no effect on your Social Security). Your checks will be reduced by $1 for every $2 you earn over an annual limit, currently $14,160 (the hit is considerably less during the calendar year you hit full retirement age).

But despite what you often read or hear, you don’t actually “lose” that money. At full retirement age Social Security will begin compensating you with a larger check for the benefits that were withheld. And you’ll receive that higher payment for the rest of your life. If you are reasonably long-lived, you’ll wind up collecting more — and you’ll have extra income from your additional years as a wage slave.

Working in retirement can also up your payments in other ways. Your check is based on your 35 highest years of wages. If you work fewer during your career, your benefit will be adjusted to reflect any extra years of work. Even if you clocked all 35 years pre-retirement, you could still get a bump if your annual earnings during your golden years were higher than some years earlier in your career.

Looks like I won’t be affected if I continue to work.  But as long as I have an income from a job, I probably won’t tap my Social Security benefits until I stop working.  Hopefully I’ll be earning enough to bump up my benefits.

QUESTION 5: Will my benefits be taxed?

You thought Uncle Sam would cut you a break after retirement? Fat chance. Currently, about a third of Social Security recipients pay income tax on a portion of their benefits, and the Social Security Administration projects upwards of 42% of recipients will be doing so by 2018.

To see whether you’ll owe taxes and, if so, to estimate what the bill might be, use our simplified worksheet (”Add up the tax bill,” above, right) or fill out the extremely detailed one in IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits, available at irs.gov.

If you want to lessen the tax bite, there are a couple of options. One is to wait at least until full retirement age to claim Social Security, if you think that income from a post-retirement job could result in a big tax bill.

Another way to avoid taxes is to pull money from a Roth IRA instead of a traditional IRA or 401(k). That’s because Roth withdrawals don’t count as income in figuring whether your benefits are taxable. So if you don’t already have money in a Roth, you may want to fund one or convert some of your traditional IRA to a Roth. After all, in retirement, you’re likely to need all the cash you can get.

Let’s see, work to full retirement age, check.  Contribute to Roth IRA, check.  Looks like I’m good to go.  How about you?

• How Long Have You Been At Your Current Job? John-Morgan My company has an intranet home page where they post service milestones.  One of the guys who was featured this week has hit the 40 year mark.  FORTY YEARS AT ONE COMPANY! Wow.  These guys must be as rare as 300-game winners in baseball.  It's like Cal Ripken......
• Repeat After Me: Retirement First, College Second mujitra (´･Ï�ï½¥) A recent U.S. News & World Report article recommended the obvious - fund your retirement accounts before you fund your child's college education.  I agree.  While there are many vehicles to pay for education expenses, you are probably the only source of your retirement savings. I say......
• 5 Financial "Widow Makers" e³°°° I was driving to the store with my son the other day, when I narrowly missed a large tree branch that was lying in the street.  "I hope nobody was under that widow maker when it fell", I said.  My son asked "why do they call it a......

• Social Insecurity (redux) I wrote about the high Phantom Rates one may encounter due to the taxation on Social Security benefits, and I continue to receive positive feedback on that article. I received two questions which I thought appropriate to address here. Is there an age after which you can earn as much......
• The New Social Security Benefit Calculator as a Reality Check Baby boomers and others thinking ahead about retirement have requested and have waited patiently for the yearly delivery of their hard copy Social Security earnings record and benefit estimate.  My statement arrives each September.   The benefit estimate information in this document can be useful in several different ways. First and foremost, it is......
• Hipfly Junior Set For Boys And Girls Age 9 - 12 Years Includes Driver, Hybrid, #6/7 And #9/PW Irons, Putter, Stand Bag User Reviews Send this to a friend Hipfly Junior Set For Boys And Girls Age 9 - 12 Years Includes Driver, Hybrid, #6/7 And #9/PW Irons, Putter, Stand Bag Manufacturer: HIPPO Golf Customer Rating: List Price: Varies based on product options Sale Price: View Sale Price Availibility: View Product......