Social Security's 50 shades of gray

I have received a slew of questions lately asking how rules for Social Security retirement benefits and survivor benefits interact. “If a spouse who never worked begins her spousal benefits at 62, will her survivor benefit amount be forever reduced as well?” Dusty Hoetger, a financial adviser with Baskins Hoetger Wealth Management, asked in a recent e-mail. “Or would it only be reduced if her husband dies before she reaches her full retirement age of 66?” Retirement benefits (including spousal benefits) and survivor benefits represent two different pots of money. Even if a spouse claims reduced Social Security retirement benefits early, her survivor benefits will not be reduced, as long as she is at least full retirement age when she collects them. It's a very common question and an important one for financial advisers to learn, as it can have a major impact on a survivor's retirement income planning. Another adviser asked a different shade of the same question. “I have a client who is age 68 and his wife is 70,” Steven Schliesser, chief executive of The Pacific Center for Financial Services, wrote in an e-mail. “The wife took her benefit at age 62,” he explained. “By delaying his benefit to age 70, would this also increase his wife's survivor benefit if he predeceases her?” Mr. Schliesser asked. “There is a lot of confusion about this topic. The client went into the local Social Security office and was told that the survivor benefit would not be higher based on the primary worker waiting to 70 to start his benefits.” Unfortunately, Mr. Schliesser received the wrong answer from the SSA rep — or at the very least, the client misunderstood the answer. Although delayed retirement credits of the primary worker do not increase spousal benefits, they do increase survivor benefits. Delayed retirement credits are worth 8% per year for each year a worker postpones collecting benefits between his full retirement age and 70. A Social Security survivor benefit is worth 100% of what the deceased worked received or was entitled to receive at time of death — including any delayed retirement credits. However, I also told Mr. Schliesser that his client is leaving money on the table. Because the wife is already collecting Social Security benefits and the husband is beyond full retirement age, he has two choices. 1. He can either “file and suspend” to trigger a higher spousal benefit for his wife now while his own benefit continues to grow. Her benefit would be worth less than 50% of his FRA benefit because she collected hers early. 2. He can file a restricted claim for spousal benefits, collecting half of his wife's full retirement age benefit (not half of her reduced benefit) while his own benefit continues to accrue delayed retirement credits. This is a great example of how an adviser can improve a retired couple's income picture. A third adviser wrote to me asking for my thoughts on his proposed Social Security claiming strategy for one of his clients. “I have a gentleman who's working full time, is 65 years old and his wife passed away last year,” the adviser wrote. “I'm thinking he should wait until 66, apply for survivor benefits and delay claiming his full retirement benefit until age 70.” I confirmed that was a smart strategy. As I explained above, survivor benefits are worth 100% of what the deceased worker was entitled to receive if collected at full retirement age. But they never grow any larger. Retirement benefits, on the other hand, accrue delayed retirement credits. So in this case, the widower could collect full survivor benefits at 66, even if he keeps working, because the earnings cap restrictions also disappear at full retirement age. He could then defer collecting his maximum retirement benefit until 70. Great work guys! You really get it. While my column may not be as titillating as the “50 Shades of Grey” novels, the results should put you on your clients' “must read” list.