Talk about double whammy! One adviser asked me for guidance on a Social Security claiming strategy for a newly widowed client. Not only did she lose her husband recently, but at the end of last year, she also lost her job.
The adviser, Dewey Engelsma with D.A.E. Capital Advisors near Grand Rapids, Mich., wanted to help his client through a rough patch and to create stable cash flow for her as she grapples with her new status as an unemployed widow.
The client is 60. Her full retirement age benefit at 66 and 4 months is $2,300 per month. Her late husband died at age 59 before claiming Social Security. His full retirement age benefit would have been $2,100 per month.
Although reduced survivor benefits are available as early as age 60, there is a complicating factor. The client will receive a severance package this year equal to one year’s salary.
Mr. Engelsma asked if the severance package, which would significantly exceed the 2017 Social Security earnings limit of $16,920, would count under the agency’s earnings limit.
Social Security beneficiaries who are under full retirement age for the entire year lose $1 in benefits for every $2 earned over $16,920 in 2017. That means earnings in excess for $50,760 ($16,920 x 3) would totally wipe out her Social Security survivor benefit. Any benefits lost to the earning test are restored at full retirement age in the form of larger monthly benefits.
I was able to deliver some good news to Mr. Engelsma: Severance pay does not count against the earnings limit.
“If you worked for wages, income received after retirement counts as a special payment if the last task you did to earn the payment was completed before you stopped working,” according to the Social Security Administration’s fact sheet “Special Payments After Retirement.” “Some special payments to employees include bonuses, accumulated vacation or sick pay, severance pay, back pay, standby pay, sales commissions and retirement payments,” the fact sheet said.
And here’s another fact some financial advisers who sell insurance products may want to tuck away for their own retirement planning: Insurance sales professionals can receive renewal or repeat commissions without affecting their Social Security benefits as long as the income is the result of work done before they retired.
Now that Mr. Engelsma determined that his client’s severance pay will not affect her Social Security benefits, he can recommend a claiming strategy.
Because her husband did not claim Social Security benefits before his death, her survivor benefit would be close to his full retirement age benefits if she claimed it at her full retirement age or 71.5% of his benefit if she claimed it at the earliest possible age of 60.
Here’s another interesting fact: A person’s full retirement age for retirement benefits may differ from their full retirement age for survivor benefits. In the case of Mr. Engelsma’s client who was born in 1956, her full retirement age for retirement benefits is 66 and 4 months but her full retirement age for survivor benefits is 66.
Although the Bipartisan Budget Act of 2015 made several changes to Social Security claiming rules, it did not change that fact that a surviving spouse who is also entitled to his or her own retirement benefit can still choose to claim one type of benefit first and switch to the other later if it would result in a bigger benefit.
Survivor benefits are worth 100% of what the deceased worker was collecting or entitled to collect at time of death if the surviving spouse claims benefits at full retirement age or later. Survivor benefits do not qualify for delayed retirement credit, so they do not increase if collected after a survivor’s full retirement age. Reduced survivor benefits are available as early as age 60.
Reduced retirement benefits, on the other hand, are not available until age 62. Full retirement benefits are available at full retirement age, which is currently 66 for anyone born from 1943 until 1954. And for every year a worker is willing to postpone collecting benefits beyond full retirement age, Social Security retirement benefits increase by 2/3 of 1% per month (8% per year) up to age 70.
Mr. Engelsma said he would suggest that his widowed client collect reduced survivor benefits now, worth about $1,500 per month, and switch to her own maximum retirement benefits at full retirement age or later. At 70, her benefit would be worth about $3,000 per month plus any intervening cost-of-living adjustments.
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