How to Help Married Couples Maximize Social Security – Community News
Social Security

How to Help Married Couples Maximize Social Security

close up of social security card and 100 dollar bill (Photo: Shutterstock)

When considering Social Security claim strategies, it’s critical to note some unique opportunities available to your married clients. Since there are two different Social Security benefits available, it is essential to calculate the optimal time to claim for each spouse.

The customer’s claim decision affects these three areas:

  1. Cash flow.
  2. How they use other assets in retirement to support their general retirement income goals.
  3. The total tax they will pay upon retirement.

Financial advisors should help married clients evaluate all options for claiming Social Security, both in a vacuum and in the context of the overall financial plan.

Here are some critical considerations when developing these strategies.

Both delay

If both spouses are in good health and have a family history of good health, consider deferring benefits until age 70. The couple will receive the most significant Social Security benefit possible. However, this will create an income gap from when they stop working until those Social Security benefits kick in.

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 if the client had completed Roth conversions or used IRA withdrawals for earnings in the early years of retirement. retirement. These techniques can lead to a lower tax bill over the entire lifespan.

Split strategy

If you need to get some cash into the household sooner, consider a “splitting strategy.” The spouse in the household who earns less will apply for benefits as soon as possible, reducing the amount to be withdrawn from other assets. More importantly, it ensures that the higher earner’s benefit is maximized at 70. The split strategy preserves the higher earner’s benefit throughout their lifetime and the life of the surviving spouse.

When a spouse dies, the smaller benefit expires. The greater benefit remains. Many widows and widowers still live for several years after the death of their spouse, and maximizing the second benefit can be an excellent protection against poverty and stress in old age.

The split strategy also offers a lot of tax flexibility. At worst, 85% of that smaller Social Security benefit will be taxable as ordinary income. Advisers can make Roth conversions or harvest from IRA money while deferring the higher earner’s benefit.

The merit test

Sometimes the lower earner is younger and may still be working. In this case, consider the merit test. The Social Security Income Test is a two-level test. The first tier is between age 62 and the calendar year that the client reaches full retirement age (FRA). The threshold is $18,000 and it moves every year. For every dollar that the customer crosses the income test threshold, they lose 50 cents from Social Security benefits. Many people think, “If I’ve made more than $18,000 this year, I won’t be able to claim Social Security benefits.”

That is not the case. It often still makes sense for the lower earner in a married household to claim early, even if they’re a little above that income test threshold, because they can lose only a few of their benefit checks throughout the year.

For example, let’s say a customer works and makes $30,000 a year. The client is $12,000 above the income threshold. That means $12,000 divided by two is the fine amount, or $6,000. Their Social Security benefit is $1,500. That means they would lose four checks over the course of the year. They would collect eight checks instead of twelve.

When they reach FRA, their benefit is adjusted for the months they haven’t received a check. While they don’t get a lump sum for those checks, their future benefit is increased by the amount they would have received had they not chosen in those months. The profit test is a cash flow penalty, not a tax.

When your client reaches FRA during the calendar year, the second threshold is significantly higher than the first threshold. Suppose your client reaches FRA in March. They could make $40,000 in January and February ($20,000 per month) and still be eligible to enjoy their full benefits year-round because of the way that threshold works in the calendar year they reach FRA.

There are many nuances to the merit test. It might be just three months or six months or nine months of extra checkups, but it can add up to several thousand dollars in a few months.

Financial advisors can deliver significant value to married clients by developing well-thought-out Social Security strategies that are aligned with the client’s overall retirement income needs, taking into account the client’s goals and health.

Joe Elsasser developed his Social Security Timing software in 2010 because as a practicing financial advisor, he couldn’t find a Social Security tool that would help his clients make the best decision about when to choose their benefits. Joe later founded Covisum, a financial technology company focused on creating a shared vision throughout the financial planning process. In 2016, Covisum introduced Tax Clarity, which allows financial advisors to show their clients the hidden effective marginal income tax rates that can significantly affect cash flow in retirement. In early 2017, Covisum acquired SmartRisk, software that allows advisors to model “what-if” scenarios with account positions and tailor a client’s risk tolerance to their portfolio risk. In January 2019, Covisum Income launched InSight, an income planning tool. Covisum is the driving force behind some of the nation’s largest financial planning institutions, serving more than 20,000 financial advisors.