Image: Senior woman © Image Source, Getty Images

Many people don't understand how to get the most out of Social Security, which leaves them collecting smaller checks than they could otherwise get. If you're trying to help a retirement-age parent with her finances -- or looking to maximize your own benefits -- you need to know how to properly work the system.

The techniques described below aren't gender specific. When I refer to "your mom," I mean the lower-earning spouse in a current or past marriage. A man can qualify for benefits based on the earnings history of his wife (or his ex or his deceased spouse) just as a woman can.

It's more likely, however, that women will have earned less over their lifetimes than the men they marry have. That means women often wind up collecting lower benefits unless they deploy some of these techniques.

"Social Security is especially important to women," said Jonathan Peterson, the author of "Social Security for Dummies" and executive communications director for AARP. "They tend to have lower earnings and to interrupt their earnings for child rearing and caregiving. They live longer . . . and there will be a whole lot of women facing later life single because of divorce or being widowed. All these things make it important for women to have their eyes open."

Before we go any further, let's review the basics of how Social Security works:

  • People typically can qualify for a reduced Social Security benefit starting at age 62. Applying early can mean locking in that lower benefit for life, plus their checks may be reduced further if they continue to work.
  • The "full retirement age," when the benefit stops being reduced, was 65 for people born before 1938 but is gradually increasing to 67 for people born in 1960 or later. Once you reach full retirement age, your Social Security benefits won't be reduced even if you continue to work.
  • People who postpone their retirement beyond full retirement age earn "delayed retirement credits" that boost their benefit by 8% for each year they put off retiring. The benefit increase stops at age 70.
  • People can opt for benefits based on their own earnings record, or they can claim up to 50% of the benefit earned by a spouse or former spouse. Opting for a spousal benefits doesn't affect the benefits of the worker who earned the benefits, whether you're still married or divorced.
  • If their spouse or former spouse is dead, people can claim up to 100% of the deceased person's benefit.

Liz Weston

Liz Weston

Okay, now we can review how to put that knowledge to use in various situations. Such as:

Your mom is married. People who earn less than their spouses, or who were out of the workforce for many years, may get a bigger check by claiming up to half of their spouse's benefit rather than 100% of their own.

But many people don't realize they have this option. Fewer than half of the respondents in a recent poll for AARP who had ever been married even knew that spousal benefits were available.

Your mom typically can start claiming a spousal benefit as soon as she turns 62, as long as her husband has started collecting his benefits. (Another option, if the husband has reached full retirement age, is for him to "file and suspend," which means he applies for Social Security but puts off receiving the checks. That allows your mom to start receiving a spousal benefit, while his own benefit can be left alone to grow.)

If your mom starts claiming benefits early, though, she's locking in a significantly smaller check for the rest of her life. Her spousal benefit check at age 62 would be 30% smaller than if she waited until 66 (today's full retirement age), Peterson said. If her husband's full retirement benefit is $1,000 a month, for example, she would get a monthly check of about $350. If she waited until she turned 66, her check would be $500.

(Furthermore, her checks will be reduced if she continues to work because of withholding, under the Social Security earnings test. In 2012, for example, people younger than full retirement age will see their retirement checks reduced by $1 for every $2 they earn over the exemption limit of $14,640. A different test applies during the year in which an individual reaches full retirement age.)

Some people prefer the "bird in hand" of a smaller check, but that's often a mistake, said Christine Fahlund, senior financial planner for T. Rowe Price. Most people, she said, are better off delaying retirement, if possible, to increase their checks and guarantee the higher payments for life. Not only are they likely to receive more money overall, but the larger checks can also serve as a kind of "longevity insurance" if you live longer than expected and exhaust your other resources.

On the other hand, "later is not always better," Peterson said. Claiming checks earlier can make sense if a person's life expectancy is short because of ill health, for example, or if she simply can't get by without the money.

You can determine the "break-even point" -- when the value of the larger checks exceeds the cost of forgoing the earlier benefit -- by using Social Security's benefit estimator. In the above example, you would first calculate how much your mom would take home in the 48 months between age 62 and age 66 if she chose the smaller benefit ($350 times 48 equals $16,800). Then you'd compare the difference in monthly payments at age 62 and age 66 ($500 minus $350 equals $150), and divide the amount from the first calculation by that amount ($16,800 divided by $150 equals 112 months, or a little over 9 years). So if Mom lives past 75 (age 66 plus 9 years), she'll earn more overall by delaying.