Shoring Up Clients’ Social Security Knowledge Part 2: Maximizing Retirement Income

"The whole topic is poorly understood," says Hans Scheil, CEO of Cardinal Retirement Planning. "All spouses are eligible at the full retirement age to apply for half of their spouse's retirement benefits."

Spouses can even apply as early as 62 ½ – but only if the main beneficiary has also claimed early. Early collection is even less advisable for couples, though, since it reduces the spousal benefit by 30 percent. For a same-age couple, that means a lower-earning 62-year-old would get just over one-quarter of the main breadwinner's benefit.

Still, there is a way for couples to collect two checks while maturing the higher earner's benefit – at least for now. As long as the higher earner was born before 1954 and has reached full retirement age, they can file a restricted application to collect half of the lower earner's benefit. Once they reach 70, they can switch gears and collect 132 percent of their own benefit.

Widows and widowers also get benefits, but the details are different.

"Lots of people are confused about the survivor benefit in particular" says Doug Amis, CFP with Cardinal Retirement Planning. "People think they're going to get a lump sum when their spouse dies."

The survivor benefit actually entitles a beneficiary to 100 percent of the deceased worker's benefit, doled out in lifetime monthly payments as before. The survivor is also stuck with the deceased spouse's filing decision, so married breadwinners with low life expectancies should still think twice about collecting early.

Taxation and income timing

What many retirees don't realize – at least until they receive their first check – is that Social Security income is indeed subject to federal income tax. For single filers, 50 percent of SSI is taxable for combined incomes between $25,000 and $34,000; 85 percent for incomes over $34,000. The same percentages apply to joint filers between $32,000 and $44,000 and above $44,000, respectively.

These figures are critical to constructing a well-timed, tax-efficient income plan.

"Don't be opposed to drawing down your 401(k) and other assets since you'll have to draw them eventually at 70, anyway," says Buckner. "The 8 percent increase in your Social Security benefits, guaranteed from 66 to 70, is pretty hard to replicate with any other investment."

Ultimately, by drawing down retirement accounts and delaying Social Security, clients can reduce their minimum distributions – and tax brackets – while growing their less-taxable SSI.

Education, outreach and long-term planning

As valuable an asset as Social Security can be, high-earning retirees tend to downplay its importance.

"Lower earners make it too big a part of their plan, but higher earners look down on it," says Blecker. "I don't care how much extra you have coming in, it's a big part of retirement, and an extra $1,5000 or $2,000 per month is significant."

Given Social Security's unique tax status and growth potential, the right collection age, spousal coordination and drawdown strategies can provide a significant boost to just about any couple's retirement income.

Given the dearth of in-depth, personalized Social Security advice, forward-thinking advisors have an excellent opportunity to grow their practices and position themselves as trusted experts on this critical, controversial topic. Simple software can spit out collection dates, but clients need more.

"You need to have the working knowledge to play through hypothetical scenarios – how strategies really affect spouses, children and the overall income plan," says Amis. "When clients come to us from other advisors, they usually haven't had those conversations."