Mary Beth Franklin: The one thing advisers should know about Social Security

I want to thank Investment News reader Larry Lindsley, a certified financial planner in Green Bay, Wis., for posing an important question about Social Security benefits for married couples. He asked how claiming reduced retirement benefits early would affect a wife's subsequent survivor benefit if she outlives her husband. Here's the situation: Larry's clients are a married couple. The wife is 62; her husband is 60. Her projected retirement benefit at her full retirement age of 66 is $1,700 per month. His is $2,400 per month. “If the wife takes her benefit at age 62 and her husband defers his benefit to his full retirement age or later, what benefit passes to the wife upon her husband's death?” Larry asked. “Will she get his full benefits or will it be reduced because she claimed her retirement benefits early?' This question embodies the essential piece of Social Security planning advice that every financial adviser needs to know: retirement benefits and survivor benefits represent two separate pots of money. Even if the wife claims reduced retirement benefits early, her survivor benefits will not be reduced as long as she is at least full retirement age at the time she collects them. Survivor benefits are worth 100% of what her husband received—or was entitled to receive—at the time of his death. If the wife claims her retirement benefit at 62, four years before her normal retirement age, she will receive 75% of her full benefit or $1,275 per month. (That assumes she is no longer working or earns less than the earnings cap which reduces Social Security benefits by $1 for every $2 earned over $15, 120 in 2013). If her husband waits until his normal retirement age of 66 to claim benefits, he'll receive $2,400 per month. His wife will not collect a spousal benefit because the $1,275 month she receives exceeds half of his retirement benefit. But if he dies first, and she is at least 66 at the time, she will receive a survivor benefit equal to 100% of his monthly retirement benefit. At that point, her lower retirement benefit would disappear. This is a classic example of why it sometimes makes sense for the lower-earning spouse to claim benefits early. Her reduced Social Security benefit boosts their household income by $15,300. And even though her retirement benefit will be permanently reduced, it will not affect her survivor benefit if he dies first. . As long as the higher-earning spouse—the husband in this case—waits until normal retirement age or later to claim his retirement benefit, he will not only lock in a bigger monthly benefit for himself, but it would translate into a larger survivor benefit for his wife should he die first. And locking the biggest survivor benefit should be the main goal of most married couples.