Match Social Security strategies to clients’ needs

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

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

The client said thanks, but no thanks.

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

“I know I will receive less of Steve’s benefits by starting at age 60, but I do not care,” Nancy, a retired teacher, 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 earnings cap restrictions. She would 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 lifetime Social Security benefits may be 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.” I noted that claiming survivors’ benefits early won’t affect her retirement benefits, which will continue to earn 8% per year between ages 66 and 70. That would be a wise move assuming her enhanced retirement benefits would be worth more than her reduced survivor benefits.

Although I often recommend that the primary breadwinner should delay claiming retirement benefits as a way of maximizing benefits for the surviving spouse, this couple has already crossed that bridge.

To be eligible for widow benefits, an individual must be 60 or older and currently unmarried (or have remarried at or after age 60). The survivor benefit amount is determined by the deceased spouse’s primary insurance amount (PIA), based on his lifetime average earnings in Social Security-covered employment, and the age at which the widow claims benefits.

Widows who claim survivor benefits at the early eligibility age of 60 can receive a monthly benefit amount equal to 71.5% of the deceased spouse’s PIA. Widows who claim benefits between ages 60 and their full retirement age receive prorated amounts between 71.5% and 100% of the PIA. Survivor benefits do not accrue delayed retirement credits so a widow who claims a survivor benefit at or after her FRA can receive a monthly benefit amount equal to 100 percent of the deceased spouse’s PIA, but no more than that.