Social Security benefit planning.

• Author: Painter, Andrew D.

In order to be entitled to Social Security retirement benefits, an individual must be insured. As a general rule, fully insured status is obtained once the individual acquires 40 quarters of coverage. Full benefits are available at age 65, with reduced benefits available at age 62. There also are increased benefits available if payments are deferred beyond age 65.

A natural instinct is to commence payments as early as possible, because payments will cease on a worker's death. Indeed, it is generally assumed that a worker will be better off electing early payments at age 62, unless the worker lives beyond age 76. However, earned income can reduce, and even eliminate, the early benefits; up to one-half of the benefits may be subject to income taxation. Both of these possibilities should be taken into account by the financial planner, who should determine the likelihood of a client's continuing to have earned income before making a recommendation to elect early payment.

The simplest and most efficient way of assisting a client in determining prospective benefits is to request an earnings history from the Social Security Administration. This information can be obtained by filing Form SSA-7004-PC, Request for Earnings and Benefit Estimate Statement. This form is available at any Social Security office or can be obtained by calling 1-800-234-5772.

The maximum annual retirement benefit for 1991 was $12,275. If a worker decides to start receiving payments prior to attaining age 65, the maximum annual retirement benefit is reduced. The schedule above illustrates the benefit reduction.

In other words, the decision to elect early payments at age 62 initially turns on the life expectancy of the worker. The worker will receive 80% of the age 65 benefit for an additional three years (during ages 62-64) at the expense of forgoing 20% of the full benefit entitlement at age 65 and thereafter. Generally, once the benefit is commenced, the amount is fixed; the only adjustment will be for cost-of-living increases.

Social Security recipients may lose all or a portion of their retirement benefits if they have earned income from wages or self-employment. In 1991, there were basically three income limitations.

* Under age 65: $7,080. * Ages 65-69: $9,720. * Age 70 or older: no limit.

For workers under age 65, any earned income above the limitation reduces Social Security benefits by $1 for every $2 of "excess earnings," i.e., earnings in excess of $7,080. At age...