Advising Clients on Social Security: Talking Points, Part 3

This installment introduces more advanced Social Security topics such as

  • Spousal Benefits (current and ex-spouses)
  • Restricted Application
  • Coordinating Surviving Spouse and Children’s Benefits
  • Coordinating spousal benefits and the “Three-Legged Stool”
  • The wisdom of taking Social Security benefits early versus late 

The purpose of this five-part series is to embolden the advisor to be proactive, not reactive in assisting clients with their Social Security options.  The advisor is the clients’ trusted advisor and must be prepared for the clients’ questions on Social Security

Spousal Benefits (current and divorced)

Spousal benefits are payable if the following requirements are met:

  1. The spouse seeking spousal benefits is at least age 62
  2. The other spouse (wage earner) is receiving retirement benefits or disability benefits - OR “filed and suspended” benefits by April 29, 2016
  3. Married for 12 continuous months

AGE 62 REQUIREMENT: Spousal benefits are equal to 50 percent of the wage earner’s Full Retirement Age benefit or PIA.  For example, if the wage earner’s PIA is $2,000 - the amount of spousal benefit payable will be $1,000.  Spousal benefits are reduced if collection is begun prior to Full Retirement Age.  Assuming a FRA of age 66, the maximum reduction is 30 percent when a beneficiary begins collection at age 62.  Thus, a spousal benefit worth $1000 at Full Retirement Age will be reduced to $700 if benefits begin at age 62.   Spousal benefits are always based on the wage earner’s PIA.  Therefore the spousal benefit would still be $1,000 at FRA even if the wage earner began own retirement benefit at age 62.

WAGE-EARNING SPOUSE MUST BE COLLECTING (OR FILED AND SUSPENDED): It must be noted the in the second requirement that the wage earning spouse must be receiving a retirement or disability benefit or having filed and suspended by April 29, 2016.  If the beneficiary is receiving a disability benefit and is under age 62, then a spousal benefit may be payable.  Many advisors are not aware that spousal benefits are payable when the wage earner is receiving a disability benefit even prior to age 62.

“DEEMED FILING”: Deemed filing can be a very confusing concept.  Deemed filing means that whenever a beneficiary files for Social Security benefits, he or she will receive the greatest benefit they are eligible to receive.  Assuming the husband was the higher wage earner, the wife will receive her benefit plus the spousal boost.  Reviewing how to calculate the spousal boost is too complicated for this article but keep in mind that if the wife begins her benefits prior to Full Retirement Age, she will never receive the full 50 percent of her husband’s Full Retirement Age benefit.  In our NSSA® class, we spend 45 minutes during explaining the complicated rules of spousal benefits and provide many examples regarding the spousal boost calculation.

Now let’s have some fun discussing benefits payable to ex-spouses.  For the sake of example, we assume that an ex-husband is seeking a spousal benefit from this ex-wife.  Spousal benefits are payable based on an ex-spouse if the following requirements are met:

  1. The marriage to ex-spouse lasted at least 10 continuous years.
  2. The ex-husband is single, however in this instance, the ex-wife can have remarried.
  3. The ex-husband is at least 62.
  4. The ex-wife is receiving a retirement or disability benefit or filed and suspended by April 29, 2016.

A notable exception is that that requirement 4 above does not apply after the couple has divorced for greater than two years.  Therefore, the ex-husband can collect a spousal benefit even if ex-wife is not receiving a benefit if they have divorced for greater than two years.  The amount of benefit and deemed filing rules are the same as for married spouses.

The Advisor’s Role – understand the requirements for spousal benefits to currently married and divorced couples.

Restricted Application

The Restricted Application is a very powerful strategy as it allows the client to receive a spousal benefit without touching their own benefits. Clients can only file a Restricted Application upon reaching Full Retirement Age.  For example, let’s assume that the advisor is meeting with a husband and wife and that the husband’s PIA is $2,500 and the wife’s PIA is $2,000.  At Full Retirement Age, the husband can file a Restricted Application to claim a spousal benefit of $1,000 and then switch to his own benefit at age 70 and receive $3,300 representing an increase of 32 percent. When waiting to age 70, the husband collects $48,000 in spousal benefits!  Keep in mind that the wife must be receiving a benefit for a spousal benefit to be paid. 

Unfortunately, the 2015 Bi-Partisan Budget Act is phasing out the Restricted Application. Clients must have attained age 62 by December 31, 2015 in order to file a Restricted Application at Full Retirement Age.  As discussed in previous articles, under Social Security rules, individuals attain their age the day before their birthday, making the Restricted Application available only for clients turning age 62 by January 1, 2016. 

The Advisor’s Role – understand that clients turning age 62 by January 1, 2016 are still eligible to file a Restricted Application at their Full Retirement Age and the advantages of using this strategy.

Surviving Spouse and Children’s Benefits

The maximum surviving spouse benefit is payable at the widow(er)’s Full Retirement Age.  Assuming that the deceased was receiving $3,000 at death, the widow is eligible for this amount at her Full Benefit Age.  A surviving spouse benefit can be paid as early as age 60. If someone begins to collect surviving spousal benefits at age 60, the benefit amount is reduced by 28.5 percent which reduces a full benefit from $3,000 to $2,145.

Children’s benefits are payable when a parent begins collecting retirement benefits, disability benefits or upon the death of a parent.  The rules are easily understandable for children’s benefits.  Benefits are payable to a child up to age 18 or continue to be payable to age 19 if the child is still in high school.  Upon graduation from high school or turning age 19, whichever is earliest, benefits terminate.  Benefits payable to a child is 50 percent of parent’s PIA when the parent is receiving benefits and 75 percent if collecting as a surviving child.  The advisor must also remember that the Annual Earnings Test applies to children’s benefits as well as adults.

The Advisor’s Role – understand the benefits payable to surviving spouses and to children.

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(Marc Kiner is the co-author of 2017 Social Security and Medicare Facts, published by The National Underwriter Company, a division of ALM Media, and available for purchase here. Kiner is also the co-founder of National Social Security Advisors, LLC, which provides education, training and certification for Social Security consulting.)

Coordinating Spousal Benefits and 3 Legged Stool

It is important that the advisor consider the coordination of spousal benefits in the Social Security options for their clients.  The coordination of spousal benefits is the KEY to helping clients understand their Social Security options and represents the second leg of the “three legged stool” for married couples.  A trusted advisor must “think outside the box” when assisting clients.  Thinking inside the box is basically looking at the clients’ Social Security benefit statement and making a decision based on benefits at three stages – age 62, Full Retirement Age and age 70.  This information is already readily available as it is posted on the client’s Social Security benefits statement.  Thinking outside the box is key and is illustrated by this three legged stool for a married couple:

Leg # 1 – At least one spouse (generally the husband, but things are changing) delays collecting benefits until age 70 to maximize DRCs and benefits.

Leg # 2 – Coordinating spousal benefits by using the Restricted Application and/or File and Suspend strategies.  Another strategy would be for one spouse to file for his/her own benefits at age 62 and the other spouse delaying filing until age 70.  This would maximize benefits for the second spouse as well as surviving spouse benefits.  Another strategy would be for a spouse to begin collecting benefits at FRA, allowing payment of spousal benefits earlier instead of waiting to age 70.  These are just a couple options.  We discuss additional options during the National Social Security Advisors certificate training.

Leg # 3 – Maximizing surviving spouse benefits.  Spouse delaying filing for benefits until age 70 will generally maximize widow/widower benefits upon death.

The Advisor’s Role – understand that you must “think outside the box” when helping clients sort through their Social Security benefits.  

Early vs Late Filing

The decision when to begin benefits is truly an individual choice.  The good advisor does not steer a client, but rather guides them through their Social Security options.  Among the factors to consider:

1) Earnings level.  If subject to the Annual Earnings Test, a client’s benefits may be withheld due to excess earnings.

2) Social Security may be a joint lifetime benefit.  Generally, upon the passing of a husband, the wife will receive a survivor’s benefit based on the benefit he was receiving at death.  If he took benefits prior to FRA, the survivors benefit payable to the widow will be smaller.

3) Ability to use the Restricted Application at Full Retirement Age.

4) Ability to control Medicare premiums when clients are receiving Social Security benefits while collecting from Medicare.

5) Personal finances.  If not working - filing for Social Security prior to FRA may be beneficial.

These are just some of the factors to be used to file for Social Security Benefits.

The Advisor’s Role – understanding the factors clients should consider when deciding when to take their Social Security Benefits.  The advisor’s job is guide clients through their various Social Security options.

Social Security is not a difficult program.  Advisors sometimes do not take proper time to understand Social Security.  This third installment focused discussion on spousal, surviving spouse and children benefits along with the Restricted Application and the three legged stool approach.  Part four will review the “do over”, voluntary suspension, filing for benefits and the family maximum benefit. 

With 76 million baby boomers coming of retirement age, an understanding of Social Security is imperative in order to be considered a trusted advisor.

(Marc Kiner is the co-author of 2017 Social Security and Medicare Facts, published by The National Underwriter Company, a division of ALM Media, and available for purchase here. Kiner is also the co-founder of National Social Security Advisors, LLC, which provides education, training and certification for Social Security consulting.)

--- Check out other Social Security Talking Points installments by Marc Kiner.

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Advising Clients on Social Security: Talking Points, Part 2

This installment will discuss more advanced topics, like explaining Social Security retirement income eligibility, and COLAs.

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