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 sixty-two, the benefit at age sixty-two is less than it will be if they wait until full retirement age — sixty-six — to begin collecting. They may be unaware that the benefit will be reduced by about 30 percent 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 sixty-six, $1 will be deducted for every $3 he earns above $40,080 (in 2013), but in this case, the 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 sixty-six 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 percent 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 percent 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 sixty, though the benefit will be reduced based on the number of months remaining until the survivor reaches age sixty-six.
