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.
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.
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