What You Need to Know
- If both spouses are in good health and have a family history of good health, consider delaying benefits until age 70.
- When the lower-wage earner claims benefits first, the bigger benefit can continue to grow.
- The earnings test is a cash flow penalty, not a tax.
When considering Social Security claiming strategies, it’s critical to note some unique opportunities available to your married clients. With two different Social Security benefits available, it’s essential to calculate the optimal time to claim for each spouse.
The clients’ claiming decision will affect these three areas:
- Cash flow.
- How they use other assets in retirement to support their overall retirement income goals.
- The total tax they will pay in retirement.
Financial advisors should help married clients evaluate all Social Security claiming options, both in a vacuum and in the context of the overall financial plan.
Here are a few critical considerations as you build these strategies.
If both spouses are in good health and have a family history of good health, consider delaying benefits until age 70. The couple will receive the most significant Social Security benefit possible. This will create, however, an income gap from when they stop working until those Social Security benefits begin.
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Roth conversions in that window can help avoid a situation later in retirement where minimum distributions are taxed at a higher marginal rate than could be achieved had the client completed Roth conversions or used IRA withdrawals for income in the early years of retirement. These techniques can create a lower lifetime tax bill.
If you need to get some cash flow into the household sooner, consider a “split strategy.” The spouse in the household who earns less claims benefits as soon as possible, reducing the amount that needs to be drawn from other assets. More importantly, it allows the higher-wage earner’s benefit to grow as large as it can be at 70. The split strategy preserves the higher-wage earner’s benefit throughout their lifetime and the lifetime of the surviving spouse.
When one spouse dies, the smaller benefit will go away. The more considerable benefit will continue. Many widows and widowers live for several years after the death of their spouse, and maximizing the second benefit can be excellent protection against poverty and stress in older age.
The split strategy also provides a lot of tax flexibility. At worst, 85% of that smaller Social Security benefit will be taxable as ordinary income. Advisors can do Roth conversions or harvest from IRA money while delaying the higher-wage earner’s benefit.
The Earnings Test
Sometimes the lower-wage earner is younger and might still be working. In this case, consider the earnings test. The Social Security earnings test is a two-tier test. The first tier is between age 62 and the calendar year the client reaches full retirement age (FRA). The threshold is $18,000, and it moves every year. For every dollar that the client exceeds the earnings test threshold, they lose 50 cents of a Social Security benefit. Many people think, “If I’ve earned over $18,000 this year, I can’t claim Social Security benefits.”