Most financial advisers consider it an important part of their job to educate their clients about how Social Security benefits fit into their retirement income plan. But some inadvertently may be hurting their female clients because they don't understand fully how claiming decisions affect survivor benefits.
Bad claiming decisions doom many women to poverty in old age.
That's the conclusion of the first-ever study of what financial advisers tell their clients about strategies for claiming Social Security. New findings from the Pension Research Council of the Wharton School of the University of Pennsylvania concluded that “many advisers still approach Social Security claiming as an individual decision rather than a household decision, [even though] clients would be better served if a household approach were utilized.”
The researchers conducted an online survey of more than 400 financial advisers from a variety of organizations — including wirehouses, independently owned firms, banks and insurance companies — about their knowledge of Social Security and their role in advising clients on claiming strategies.
They were asked to consider several hypothetical scenarios involving 62-year-olds and select from among three strategies the one they would be most likely to suggest in each situation. When the scenario involved a couple, the strategies included having the husband:
• Claim reduced benefits as early as possible, even if he is working and subject to earnings cap limits.
• Wait until normal retirement age to claim full benefits.
• Delay until age 70 to receive the maximum benefits.
In many cases, delayed claiming is the best choice and can make a big difference in income at older ages, particularly for the wife, who is likely to live longer than her husband and be more dependent on Social Security survivor benefits for income.
But in a scenario in which a 62-year-old man — in average health and with lifetime earnings significantly higher than his wife's — was considering retiring that year, only 20% of advisers would advise him to delay claiming maximum Social Security benefits until age 70, even if the couple had $800,000 in assets. Nearly a third of the advisers surveyed said they would recommend that he claim benefits as soon as possible, even though it would lower his widow's survivor benefits significantly.
A woman with lower lifetime earnings than her husband can claim spousal benefits worth up to half of the husband's benefit if she claims at her normal retirement age of 66, less if she claims benefits earlier.
But if the husband dies first, as is likely, the wife switches to survivor benefits worth 100% of the monthly benefit that her husband received. If he had waited until 70 to claim the maximum benefits — including 8% per year delayed-retirement credit between ages 66 and 70 — her survivor benefit would reflect those credits.
“For the majority of married couples, the widow's benefit should be the predominant concern,” said Kenn Tacchino, co-director of the New York Life Center for Retirement Income at The American College. “So often, advisers look at the break-even analysis and ignore the insurance value of Social Security,” he added. “You need those extra dollars on the back end when you are very old — not to help you buy a boat when you're 64.”
Dana Anspach, principal of Sensible Money LLC, which focuses on retirement income, Social Security claiming strategies and tax-efficient withdrawals, said it's critical to lock in the biggest survivor benefit possible. And despite her expertise in Social Security, she relies on software to determine the optimum timing and claiming strategy for clients, and said most advisers should, too.
mbfranklin@investmentnews.com Twitter: @mbfretirepro
