The secrets of Social Security

Even for the typically affluent clients of financial advisers, informed decisions about how and when to claim Social Security benefits can mean thousands of extra dollars a year, and tens of thousands of dollars over a lifetime. Are you prepared to advise clients on this crucial decision?

Although there has been a growing awareness of the value of waiting until later in life, when benefit levels are higher, the majority of retirees still claim benefits as early as they can, at 62. But just because they can doesn’t mean that they should, particularly if they plan to continue working, as so many boomers now expect to do.

Claiming benefits before the normal retirement age of 66 means that earnings will be subject to an annual cap (currently $14,640). Benefits are reduced by $1 for every $2 earned over that.

Once beneficiaries turn 66, the earnings limit disappears.

Married couples have the most flexibility when it comes to Social Security claiming strategies. In some cases, it may make sense for the lower-earning spouse — usually the wife — to claim benefits early, even though it means her retirement benefits will be permanently reduced.

But as long as the higher-earning spouse — usually the husband — waits until normal retirement age or later, he not only will lock in a bigger retirement benefit, but it will translate into a larger survivor benefit for his wife should he die first. Even though her retirement benefits were reduced permanently because she claimed benefits early, her survivor benefits won’t be affected as long as she is at least normal retirement age at the time that she begins collecting them.

Locking in the biggest survivor benefit — 100% of what the deceased spouse received during his or her lifetime — should be the main goal of most married couples.

Delayed retirement credits are worth 8% per year for every year you put off collecting benefit from 66 to 70. But that doesn’t mean you have to forgo all benefits until 70.

One clever strategy allows you to collect some money now and more later.

Let’s say that the wife begins collecting her retirement benefit at 62, based on her own work record. If she will be entitled to $1,600 per month at her full retirement age of 66, her benefit at 62 will be reduced permanently by 25% to $1,200 per month.

Assume that the husband’s benefit is worth $2,000 at 66, but he plans to wait until 70 to collect when it will be $2,640, providing a larger base for future cost-of-living adjustments. Once he reaches 66, he can “restrict his claim to spousal benefits only” and collect half of his wife’s full benefit each month while his own benefit continues to grow at 8% per year until he is 70.

That boosts the couple’s income by $9,600 per year. That extra income probably is something the couple wouldn’t know about without the help of a trusted adviser like you.

Last summer, Social Security Timing, a web-based advice tool, surveyed more than 500 married couples between 60 and 66 regarding their knowledge of Social Security-claiming strategies. Although 27% knew that the size of their monthly benefit was based on the age when they begin collecting, more than 70% weren’t aware of unusual claiming strategies such as the “claim now and claim more later” strategy described above.

What better opportunity for an adviser to than provide this much-needed information?

But Social Security rules are complex.

For example, different rules apply to clients who receive federal and state pensions, including some public school teachers, substantially reducing Social Security benefits to those workers and their spouses. And there are special rules for divorced and widowed beneficiaries.

Before you dispense advice, make sure you understand the rules. To get the information that you need, AARP’s free Social Security claiming decision tool at aarp.com is a good start, but it isn’t sophisticated enough for financial planning purposes. For that, take a look at ssanalyzer.com.

The more you learn about Social Security, the more your clients will thank you. I also suspect that prospective clients, who may be shopping for an adviser as they prepare to retire, may be equally impressed by your grasp of this very important subject.

Mary Beth Franklin welcomes your comments and suggestions for column topics.