Most financial advisers consider it an important part of their job to educate their clients about how Social Security benefits fit into their overall retirement income plan. But some may be inadvertently hurting their female clients by not fully understanding how claiming decisions affect survivor benefits, dooming many of them to poverty in very old age.
That's the conclusion of the first-ever study of what financial advisers tell their clients about Social Security claiming strategies. The newly released findings from the Wharton School's Pension Research Council 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 was 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 also asked to consider several hypothetical scenarios of 62-year olds and select one of three strategies they would be most likely to suggest in each situation, including claiming reduced benefits as early as possible, even if the client was still working and subject to earnings cap limits; waiting until normal retirement age to claim full benefits; or delaying until age 70 to receive the maximum benefits.
In many cases, delayed claiming is the best choice and can make a significant difference in income at older ages, particularly for women who tend to live longer than men on average and are more dependent on Social Security survivor benefits for income in retirement.
But in a scenario where a 62-year old man in average health and lifetime earnings that were significantly higher than his same-aged wife planned to retire at 62, only 20% of advisers recommend that he delay claiming maximum Social Security benefits at age 70, even though the hypothetical couple had $800,000 in assets that could easily allow them to delay his claiming decision. And nearly a third of the advisers recommended claiming benefit early at 62, even though it would significantly lower survivor benefits for the widow later in life.
Women who have lower lifetime earnings than their husbands 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, which is actuarially likely, the wife switches to survivor benefits worth 100% of the monthly benefit that her husband received. And if he had waited until age 70 to claim the maximum benefits—including 8% per year delayed retirement credit between ages 66 and 70—her survivor benefit would include those delayed retirement credits.
“For the majority of married couples, the widow's benefit should be the predominate concern, “ said Kenn Tacchino, co-director of the New York Life Center for Retirement Income at The American College in Bryn Mawr, Pa. “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, a Scottsdale, Az-based firm that focuses on retirement income, Social Security claiming strategies and tax-efficient withdrawals, says it's very important to lock in the biggest survivor benefit possible. And despite her extensive knowledge of Social Security, she relies on software to determine the optimum timing and claiming strategy and says most advisers should, too.