Mary Beth Franklin: Ticking the right boxes for Social Security

Although I was on vacation in Florida last week, my phone never stopped ringing and my e-mail box is full with questions about Social Security claiming strategies. (I’m still picking the sand out of my iPhone!)

The e-mail traffic was a bit heavier than usual thanks to a recent rerun of a Social Security special that I taped with Consuelo Mack on her WealthTrack program that originally aired on PBS stations last year. [To watch the video, click HERE.]

The many questions from WealthTrack viewers offer some insights into what your current or prospective clients may be asking about the best way to maximize Social Security benefits. It seems that financial advisers should bone up on claiming strategies for married couples, particularly when one or both spouses have been previously married.

Janis, a viewer from Venice, Fl., is 64 and began collecting her Social Security benefits early at 62. Her benefits total about $8,000 per year. Her husband, an 80-year old cancer survivor, collects about $16,000 per year in benefits.

Janis was previously married to a younger man decades ago. They were married for 13 years.

Looking ahead, Janis wonders if her current husband dies, would she be able to collect benefits on her ex-husband’s earnings record as his benefits, once he turns 62 in a few years, are likely to be higher than her current husband’s benefits.

The answer is a qualified yes.

“You cannot collect benefits on your ex-husband’s earnings record while your current husband is still alive,” I wrote to Janis. “But if he dies, you can collect 100% of his current amount as a survivor benefit if you are at least 66 years old at the time; less if you are younger. Or you could collect spousal benefits on your ex-husband’s earning record if that would result in a larger benefit.”

Although ex-spouses are entitled to the same spousal benefits as married spouses under certain circumstances, they have an additional advantage: they don’t have to wait for their ex-spouse to claim Social Security benefits in order to claim their share. As long as the ex-spouse is eligible to claim—that is, at least 62 years old and was married to them for at least 10 years—an ex-spouse, who is not currently married, can claim spousal benefits.

But keep in mind that a spousal benefit is worth only half of the worker’s benefit if claimed at normal retirement age; less if claimed earlier. A survivor’s benefit is worth 100% of what the worker received or was entitled to receive at the time of his or her death if claimed at normal retirement age.

Spousal benefits can be claimed as early as age 62. Survivor benefits can be claimed as early as age 60. But in both cases, benefits would be smaller than if claimed at normal retirement age which is currently 66 and will eventually increase to 67.

So the question is, if Janis’s current husband dies, would she be better off collecting $16,000 per year in survivor benefits or half of the amount of her ex-husband’s retirement benefit?

Given that the current maximum retirement benefit in 2013 is $2,533 per month or $30,396 per year, it’s a close call with an edge to the survivor benefit. Of course, that could change in a few years as annual cost-of-living adjustments will boost maximum retirement benefits, meaning half of her ex’s retirement benefit could be more than 100% of her current husband’s survivor benefit.

The other fact to keep in mind is that although Janis’s retirement benefits were permanently reduced by 25% because she collected them four years early, her survivor benefits will not be reduced if she is at least 66 when she collects them. So she could receive 100% of her current husband’s survivor benefit but less than half of her ex-husband’s spousal benefit because she collected her own retirement benefits early.

But if Janis survives both her current and former spouse, she would have her pick of which widow’s benefit to collect. At that point, she could switch to spouse #1 and double her Social Security income.

I’ll be answering Social Security questions live during the annual Morningstar Individual Investor Conference in Chicago next Saturday March 23 starting at 2:30 p.m. CT. You can listen for free but you must register here.