Financial advisers have their clients' best interests in mind when they try to craft an optimal Social Security claiming strategy to maximize clients' benefits over their lifetimes. But sometimes, it just amounts to wishful thinking.
Chris Hughes, a financial adviser with the Del Monte Group in Alamo, Calif., asked me to review a possible claiming strategy for his clients, Carl and Betty. Carl, 62, still works full time. Betty, his 70-year-old wife, is a homemaker.
Mr. Hughes asked if it would be possible for Carl to claim Social Security benefits early at 62 in order to trigger a spousal benefit for Betty, who has no Social Security benefits of her own.
A spousal benefit is equal to half of the worker's full retirement age amount, assuming the person who collects the spousal benefit is full retirement age or older. Spousal benefits are based on the worker's full retirement age amount even if the worker claims reduced benefits early or larger benefits later.
(More: When both spouses lose some or all of their Social Security benefits)
At 70, Betty certainly meets the age test for full spousal benefits. But this strategy won't work because Carl is still employed and earning $75,000 a year — well above the annual earnings cap. His salary would virtually wipe out any Social Security benefits for both Betty and him.
Mr. Hughes suspected as much, but wanted to check with me just in case he misunderstood the rules.
ALL BENEFITS WIPED OUT
“If Carl earns $75,000 a year, it would essentially eliminate all their Social Security benefits, assuming their monthly benefit is $2,500 ($1,500 for Carl and $1,000 for Betty), right?” Mr. Hughes asked.
Correct. Because Carl is under full retirement age, he is subject to the earnings cap. Anyone who is under full retirement age for the entire year loses $1 in benefits for every $2 earned over $15,720 in 2015.
At Carl's salary level, his benefits — and those of his wife, who would be collecting benefits on his earnings record — would be reduced to almost nothing. They would forfeit $29,640 in Social Security benefits. ($75,000 - $15,720 = $59,280/2 = $29,640)
Assuming Carl and Betty's combined benefits would amount to $30,000 per year ($2,500 x 12 months), the couple would receive just $360 after the earnings cap reduction. ($30,000 - $29,640 = $360) It's definitely not worth it for Carl to file for his Social Security benefits now at age 62. He and Betty should wait until Carl turns 66 — or stops working — to claim Social Security benefits.
REVERSE SITUATION
Separately, Alan Tran, a New York Life Insurance agent in New York City, asked about a reverse situation. Mr. Tran wanted to know whether one of his clients, a 66-year-old husband, could collect spousal benefits on his 62-year-old wife's earnings record.
(More: A Social Security benefit is a terrible thing to waste)
I told him that for the husband to file a restricted claim for spousal benefits at his full retirement age of 66, the wife must first claim her Social Security benefits. However, if the wife is still working, she would be subject to the earnings cap restrictions and the husband's spousal benefits could also be reduced.
Given the couple's four-year age difference, a better strategy might be for the husband to wait until age 70 to collect his maximum Social Security benefits. He would automatically earn an extra 8% for every year he postponed collecting his Social Security beyond his full retirement age up to age 70, boosting his benefit to 132% of his full retirement age amount, which would also translate into a larger survivor benefit.
At that point, his wife, who would be 66, could file a restricted claim for spousal benefits, collecting half of her husband's full retirement age benefit amount (not half of his age 70 benefit) for four years and switch to her own larger benefit at 70.
However, depending on the relative amounts of their benefits, it may not be in the couple's best interest to have both spouses delay their benefits until 70.
Michael Kitces, director of planning research for Pinnacle Advisory Group, recently
published a fascinating analysis on his Nerd's Eye View blog about why it seldom makes sense for both spouses to delay collecting Social Security.
“A survivor only receives the greater of the survivor benefit or his/her own retirement benefit,” Mr. Kitces noted. “As a result, if both members had substantial income in the working years and will have similar retirement benefits, the higher survivor benefit is of little or no value.”
In most cases, it makes sense for the higher-earning spouse to delay benefits up to age 70. But you have to crunch the numbers to see if it makes sense for both spouses to delay.
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