Sometimes, cash now is better than more cash later

I received a really interesting question from an adviser in Minnesota recently who was looking for advice on Social Security-claiming strategies for a newly widowed client.

The adviser suggested that in order to maximize her benefits, his 59-year-old client should wait until 66 to collect survivor benefits and then switch to her own retirement benefits when she turns 70.

She said thanks but no thanks.

The client, Nancy, decided to take survivor benefits at 60, even though they will be reduced, and to switch to her own retirement benefit at 70. Her benefit will increase by 8% per year between her normal retirement age of 66 and 70.

“I know I will receive less of Steve’s benefits by starting at age 60, but I do not care,” Nancy wrote in an e-mail to her adviser.

Nancy also knows that if she collects Social Security benefits before her normal retirement age, she will be subject to an earnings cap. She will lose $1 in benefits for every $2 she earns over $15,120 in 2013.

“I know I cannot make more than about $15,000 and I do not intend to,” she wrote. “I lost Steve at an early age and my plan is to travel until I meet up with him again, and the survivor benefits will allow me a bit more each month.”

Her sad but touching response should be a lesson to advisers everywhere. While maximizing Social Security benefits is a laudable goal for many clients, sometimes immediate cash flow is more important.

“After losing her husband at a young age, she wants to enjoy her life to the fullest,” I wrote to the adviser. “As long as she is earning less than the earnings cap, encourage her to claim her survivor benefits at 60 so she can afford to travel.”