Determining Social Security entitlement is often a more difficult piece of the puzzle than anticipated when it comes to helping clients project anticipated retirement income. When spousal benefits and survivor’s benefits are added to the equation, the complexities of determining an anticipated Social Security income stream become even more acute. Calculating the level of benefits a spouse might be entitled to, and the factors that could increase or decrease that expected benefit, can be tricky in itself, but planning for outside factors—such as which spouse might die first—is often completely overlooked in Social Security planning. Guiding clients through the often-confusing web of Social Security rules can prove difficult, but by keeping some basic principles in mind, you can help clients make the most of their entitlements.
Social Security While Working
Most of your clients know that though they are eligible to begin collecting Social Security benefits at age 62, the benefit at age s62is less than it will be if they wait until full retirement age—66—to begin collecting. They may be unaware that the benefit will be reduced by about 30% if the client continues to work while claiming benefits before full retirement age.
This is because of the tax penalty that applies to clients who continue to work while claiming benefits. A client who is younger than full retirement age will lose $1 for every $2 dollars he earns in excess of the annual limit, which is $15,120 in 2013. In the year the client turns age 66, $1 will be deducted for every $3 she earns above $40,080 (in 2013), but in this case, only income that the client earns in the month before reaching full retirement age is counted. There is no earnings limit for the month the client turns 66 and thereafter.
Spouses and Survivors
Your clients may be eligible for Social Security benefits regardless of whether they have ever earned income. This spousal benefit can be up to 50% of the working spouse’s benefit if the nonworking spouse waits until full retirement age to claim. Otherwise, the percentage is reduced based on the number of months remaining until the nonworking spouse reaches full retirement age.
It is also possible that the nonworking spouse actually did have enough earned income to qualify for traditional Social Security benefits, but those benefits may be less than the 50% spousal benefit. In this case, that spouse is eligible for the higher level benefit, but it will be made up of a combination of the nonworking spouse’s own benefit and a portion of the spousal benefit—the full amount of both benefits cannot be claimed.
Even if the working spouse is not ready to claim benefits—perhaps waiting to claim a higher level of benefits at an older age or is still working—the nonworking spouse can begin to receive spousal benefit using the file and suspend strategy.
Once either spouse dies, spousal benefits are no longer an option. At this point, a survivor’s benefit may kick in to either replace the spousal benefit or provide a new benefit to the surviving spouse. The surviving spouse can begin to claim survivor’s benefits as early as age 60, though the benefit will be reduced based on the number of months remaining until the survivor reaches age 66.
Like the spousal benefit, the amount of the survivor’s benefit is based on the deceased spouse’s traditional retirement benefit, meaning that the more that spouse earned, the higher the survivor’s benefit will be. If the surviving spouse reached full retirement age, the survivor’s benefit will equal 100% of the deceased spouse’s benefit. If the deceased spouse was receiving a reduced benefit, the survivor’s benefit is based on that reduced amount. If the surviving spouse is working, there are earnings limits that can reduce the benefit level, as well.
Suspending Receipt of Benefits
If your client has reached full retirement age but is not yet ready to begin collecting benefits, the file and suspend strategy can allow a nonworking spouse to begin collecting spousal benefits without jeopardizing the working spouse’s full retirement benefit. The working spouse can simply file for benefits and then make a subsequent filing to suspend these benefits.
During the time that the benefits are suspended, the working client earns delayed retirement credits, which increase the eventual benefit level by 8% for each year in which benefits are suspended. The taxpayer must begin to collect benefits by age 70, by which point she can have increased the benefit level substantially.
Voluntary suspension is similar to file and suspend—it is a strategy for clients who began collecting benefits before full retirement age, whether working or not, without fully understanding the reduction in benefits caused by early filing. These clients can elect to suspend their benefits, but the 8% in annual delayed retirement credits will be added to the lower base level where they originally began collecting benefits before age 66.
Maximizing your clients’ Social Security entitlement is not an easy task. The web of options may be difficult for even the most financially astute client to manage on his own. With careful, however, you can make sure your clients get the benefits they deserve.
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