Retirement 2.0blog

Age gap can thwart couples' Social Security-claiming strategies

Financial advisers may need to consider other income options

Mar 3, 2014 @ 11:37 am

By Mary Beth Franklin

Do you ever feel like your clients are asking you to be a magician, pulling an optimum retirement income strategy out of your hat?

A coordinated Social Security-claiming strategy can act as a magic wand for some couples, allowing an older, higher-earning spouse to file and suspend in order to trigger benefits for a spouse with little or no benefits of his or her own. Meanwhile, the higher earner's own benefit continues to accrue delayed retirement credits worth 8% per year for every year he or she postpones benefits beyond full retirement age up to 70.

More: Resources to help advisers become Social Security experts

That strategy not only locks in a maximum retirement benefit for the bigger earner, but ensures that the largest possible survivor benefit will continue for whichever spouse is left behind after the first one dies.

But in order to engage in such valuable claiming strategies, you have to wait until you reach your magic age of 66 to claim benefits. (If you were born after 1954, your magic age is higher, up to 67 for those born in 1960 and later.) That's when you qualify for full retirement benefits, are no longer subject to earnings cap restrictions and can exercise creative claiming strategies such as file and suspend or filing a restricted claim for spousal benefits only.

Related: When the best Social Security strategies go wrong

But for some couples, these claiming strategies just won't work because of their age difference.

One adviser wrote to me recently asking for Social Security guidance for her clients — a married couple in which the wife is 62 and the husband is five years younger. The wife does not have enough work credits to qualify for Social Security benefits on her own.

You need a minimum of 10 years or 40 quarters of covered employment where you paid FICA taxes to be eligible for Social Security retirement benefits. In 2014, you need to earn at least $1,200 to qualify for a quarter of coverage.

But even with no earnings record of her own, the wife is entitled to a Social Security benefit as a spouse.

The adviser asked how soon the wife can collect Social Security benefits. When she turned 62? When she reached her full retirement age of 66?

The answer is neither. Because the wife is not eligible for Social Security benefits on her own, she must wait until her husband claims benefits in order for her to collect her spousal benefits. Or, once he reaches full retirement age, he could file and suspend to trigger her spousal benefits while his benefits continue to grow.

But the earliest age he can claim Social Security is 62, at which point his wife will be 67. And if he claims early, not only will his Social Security benefits be reduced, but he will be subject to earnings cap restrictions if he continues to work while collecting benefits before his full retirement age.

So a decision to claim reduced benefits early could backfire if he's still working. If he earns too much, his Social Security benefits could be temporarily reduced or even wiped out, and so could hers since she is collecting on his record.

In 2014, beneficiaries who are younger than their full retirement age for the entire year lose $1 in benefits for every $2 earned over $15,480. The earning cap is increased each year to keep pace with inflation.

Plus, if he collects reduced retirement benefits early, he also is locking in a lower survivor benefit. Survivor benefits are worth 100% of what the deceased worker claimed or was entitled to claim at the time of death. A reduced retirement benefit translates into a lower survivor benefit.

I told the adviser she has to decide which is more important to her clients: creating Social Security income for the wife as soon as possible or locking in a bigger survivor benefit.

It seems to me that Social Security is not the solution to this retirement income puzzle. The adviser will have to weigh other options, such as relying on the younger husband's continued earnings, tapping the couple's portfolio for supplemental income or buying an annuity to bridge the income gap before the older wife can collect Social Security.

That's why clients hire advisers like you to come up with the answers. It's not magic. It's simply retirement income planning.

Mary Beth Franklin on why 66 is a magic number for retirement

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 30

Conference

Adviser Compensation & Staffing Workshop

The InvestmentNews Research team will present exclusive data and highlights from its bellwether benchmarking study that will identify best practices for setting and structuring compensation and benefits packages throughout your... Learn more

Featured video

INTV

Why broker-dealers are on a roll

Deputy editor Bob Hordt and senior columnist Bruce Kelly discuss last year's bounce-back for IBDs.

Latest news & opinion

UBS continues to cut loans to recruits, while increasing compensation to brokers

The wirehouse reduced recruitment loans 20% and increased bonus loans 68% in the first quarter.

Things are looking up: IBDs soared in 2017

With revenue up, interest rates rising and regulation easing, IBDs are soaring.

SEC advice rule may give RIAs leg up over broker-dealers

Experts say advisers will be able to point to their role as fiduciaries as a differentiator in the advice market.

Brokers accept proposed SEC rule on who can call themselves an adviser

Some say the rule will clear up investor confusion, but others say the SEC didn't go far enough.

SEC advice rule: Here's what you need to know

We sifted through the nearly 1,000-page proposal and picked out some of the most important points.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print