Mary Beth Franklin: The question Social Security calculators can’t answer

Last weekend, I participated in a retirement income forum sponsored by a local wealth management firm near my home in Falls Church, VA. Nearly 300 of the firm’s clients attended the six-hour program that ran from breakfast through lunchtime and included a dozen break-out sessions on a variety of retirement-related topics.

I spoke to two standing-room only sessions on Social Security claiming strategies. Afterwards, attendees formed a Conga line to the podium to ask questions about their personal situations and several e-mailed their questions to me after the event.

As much as I enjoy writing about these topics for financial advisers, I relish answering questions from their clients because it gives me a real insight into how little the general public knows about these strategies and how desperate they are for information about such a critical part of their retirement income plan.

Tom Arntson of Chesapeake, VA, had a great question that demonstrated to me the real value financial advisers can offer their clients in helping them make important decisions about when to claim Social Security benefits. It goes beyond merely plugging in benefit amounts into a Social Security calculator. It requires overlaying some common sense into whether waiting to collect a bigger benefit always makes sense.

Tom is 72 years old and plans to retire in September when his wife, a retired school teacher, turns 65. He started collecting his maximum benefit at age 70. He wonders whether his wife should delay collecting her Social Security benefits until she reaches her full retirement age of 66 when she could file a restricted claim for spousal benefits. That would allow her own retirement benefit to grow by 8% per year starting at age 66 until they reached the maximum amount at age 70.

Tom’s benefit, including delayed retirement credits, is $3,050 per month. That compares to his primary insurance amount of about $2,600 per month at his full retirement age of 66. His wife’s benefit based on her own work record is about $1,400 per month.

Yes, she could wait another year until she turns 66 to file a restricted claim in order to collect a spousal benefit of about $1,300 per month—half of his retirement benefit at full retirement age. (Remember, spousal benefits do not qualify delayed retirement credits, but retirement benefits do). Her retirement benefit would grow by 8% per year to about $1,840 per month at age 70 when she could switch to her own benefit.

Although this strategy would undoubtedly increase the couple’s income by about $500 per month at age 70, I wonder whether it is worth the wait. It seems like a worthwhile tradeoff on the surface, but I don’t know the other details of their finances the way their financial adviser does. Regardless of the ultimate decision, it presents a great opportunity to review their overall retirement income plan.

In order to execute the strategy of collecting spousal benefits only, Tom’s wife would need to wait another year until she turns 66 to collect about $1,300 per month. On the other hand, if she collected benefits when she turns 65 in September, she would receive about the same amount based on 93% of her own retirement benefit collected one year before her full retirement age.

Yes, by collecting now she would forfeit the chance to collect a larger benefit in five years. But keep in mind that when it comes to coordinating Social Security claiming strategies, the main goal for most married couples should be to maximize the survivor benefit. Tom, as the prime breadwinner, has already done that by delaying his benefit until age 70.

If Tom dies first, his wife would step up to a survivor benefit worth 100% of what he collects—including the delayed retirement credits. At that point, her own smaller retirement benefit would disappear. If she dies first, Tom would not be entitled to a survivor benefit because his retirement benefit is larger than hers (even if she delays collecting her maximum benefit until age 70). He would continue to receive his benefit, but hers would cease.

Of course the great unknown is: how long will Tom and his wife live?

The average life expectancy of a 65-year old male is age 83. For a female, it’s 86. But that means about half of all 65-year old men and women will live even longer than average. And for married couples, there is a 50% chance that one of them will live until 90 and a 25% chance that one of them will survive well into their 90s, according to the LIMRA Retirement Income Reference Book 2012.

Retirement planning is not about planning to average life expectancy; it is about planning beyond life expectancy. For many Americans, Social Security benefits represent their only guaranteed, cost-of-living adjusted source of retirement income they can’t outlive.

So the real question is would the couple benefit from collecting an extra $15,600 per year starting now or waiting an additional year to start roughly the same amount of benefits with the promise of an even larger benefit later? Only their adviser can answer that question—and that’s the reason they need you to understand not only how to optimize Social Security benefits, but how they fit into their personal retirement income puzzle.