Social Security looms for Baby Boomers

Talk about a stampede: The first wave of Baby Boomers begins turning 65 in 2011, which means they'll soon be tapping Social Security retirement benefits, if they haven't already. If you're a Boomer and haven't yet investigated how this program works, this may be a good time to learn the ropes.

When you work and pay Social Security taxes, you earn up to four "credits" per year based on net income. In 2011, it takes $1,120 in income to earn one credit. You must accumulate at least 40 credits over your lifetime to qualify for a benefit; however, those who haven't earned sufficient credits sometimes qualify based on their spouse's work record.

Retirement benefits are calculated based on earnings during 40 years of work. The five lowest-earning years are dropped and each year not worked counts as zero. "Full retirement age" increases gradually from 65 for those born before 1938 to 67 if born after 1959.

If eligible, you may begin drawing benefits at 62; however, doing so may reduce your benefit by up to 30 percent. The percentage reduction gradually lessens as you approach full retirement age. Alternatively, if you postpone participating until after reaching full retirement age, your benefit increases by 7 to 8 percent per year, up to age 70.

You can use the Retirement Planner tools at www.socialsecurity.gov/retire2 to estimate your retirement benefit under different earnings, age and life-expectancy scenarios.

If you're married and your earned benefit is less than 50 percent of your spouse's, you're eligible for a benefit equal to half of theirs. Spousal benefits also are available if you're divorced, provided: your marriage lasted at least 10 years; you remained unmarried before age 60 (or that marriage also ended); and you're at least 62. If you remarried after age 60 (or 50, if disabled), you can still collect benefits based on your former spouse's record.

If your spouse dies and was benefits-eligible, you and your children may be eligible for survivor benefits. Amounts vary depending on age, disability status and other factors. Read the Survivors Planner at www.ssa.gov/planners/survivors/ifyou.html for details.

Know that if you begin collecting Social Security before full retirement age yet continue to work, your benefit may be reduced. In 2011, you'll lose one dollar in benefits for every two dollars you earn over $14,160. (Note: Investment income doesn't count.)

However, if you reach full retirement age in 2011, the formula changes: $1 will be deducted from your benefits for each $3 you earn above $37,680 until the month you reach full retirement age. After that, no further reductions.

Thus, if you think you'll need to continue working, it might be wiser to hold off collecting Social Security until reaching full retirement age. These benefit reductions are not completely lost, however: Your Social Security benefit will be increased upon reaching full retirement age to account for benefits withheld due to earlier earnings

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And finally, although Social Security benefits aren't taxed by many states, they are considered taxable income by the federal government. So, depending on your income, you may owe federal income tax on a portion of your benefit. For more details, read IRS Tax Topic 423 and Publication 915 at www.irs.gov.