Getting personal with Social Security-claiming strategies

I love helping financial advisers and their clients figure out the best way to claim Social Security benefits. I think it is one of the best ways to ensure a secure retirement. But sometimes, the question — and questioner — strikes closer to home. I received an e-mail from my sister-in-law, Lillian, this week. She had just turned 62 and wondered whether she should claim Social Security benefits and if so, which benefits to claim. Lillian was widowed four years ago when my brother died at 61. Although my big brother will always be "Bobby" to me, to Lillian and all his friends, he was "Bugs." His high school nickname served him well during his many years in the boxing ring, a hobby that probably was responsible for his early-onset dementia. Long after the disease had robbed him of his ability to talk, work, drive a car or even ride a bike, Bugs still went to the gym every day and insisted on walking home – his last shred of independence. He was hit by a car when crossing a busy street near his home outside Philadelphia in 2009 and died a few months later. Although widows and widowers can collect survivor benefits as early as 60, their benefits are reduced to about 71% of the deceased worker's benefit amount compared with waiting until the full retirement age of 66 to collect them. In addition, any Social Security benefits collected before full retirement age are subject to earnings cap restrictions. Lillian said she could collect reduced retirement benefits on her own work record of about $1,000 per month if she claimed now or reduced survivor benefits of about $1,700 per month. If she waited until her full retirement age of 66 to collect benefits, she could choose between her own benefit worth about $1,250 per month and her widow's benefit, which would be worth about $2,200 per month. Remember, survivor benefits and retirement benefits represent two different pots of money. Someone who is entitled to both can choose one benefit first and switch to the other later if it would result in a bigger benefit. Lillian is still working, but as a real estate agent, her income is inconsistent and hard to predict. She would like some extra income now, but isn't desperate for cash. I suggested that Lillian claim her own reduced retirement benefits now and switch to collecting her full survivor benefit when she turns 66. That would give her a bigger benefit to look forward to in the future and create a larger base for future cost-of-living adjustments. Even if Lillian collected reduced retirement benefits now, her survivor benefits wouldn't be reduced if she were at least full retirement age when she collected them. But the survivor benefit won't grow any bigger, so it makes no sense to delay collecting it beyond her full retirement age. Unlike retirement benefits that earn delayed retirement credits worth 8% per year between full retirement age and 70, survivor benefits are frozen in time. They are worth 100% of what the deceased work was receiving or was entitled to receive at time of death if the survivor collects it at his or her full retirement age; less if collected earlier. In the meantime, if Lillian collects retirement benefits now before her full retirement age, she will be subject to the earnings cap restrictions. This year, benefits are reduced by $1 for every $2 earned over $15,120 that year. There is a higher earnings limit -- $40,080 — in the months leading up to one's birthday for those who turn 66 in 2013. In that case, $1 in benefits is withheld for every $3 earned over the higher limit. Social Security adjusts the amount of benefits based on the recipient's estimated earnings. Benefit overpayments must be repaid later. In most cases, benefits that are forfeited to the earnings cap aren't gone forever. They are merely deferred. Retirement benefits would be increased starting at full retirement age to take into account those months in which benefits were withheld. But in Lillian's case that won't matter. At 66, she will switch to survivor benefits which are based on her late husband's earnings, not hers.