Social Security Planning

Finding the right age and correct strategy to claim Social Security retirement benefits can have a substantial impact on a retiree’s financial security. It is essential for CPA personal financial planners to educate clients about the options and run the numbers pertaining to different claiming scenarios assuming different life expectancies. Traditionally, the Social Security Administration’s (SSA) default position has been to recommend the option that provides recipients the largest benefit today, which may be a good idea if you are in ill health and without sufficient assets. However, after considering early retirement penalties, delayed retirement credits, survivor benefits, inflation cost of living adjustments, two-income households, the tax advantage of Social Security and longer life expectancies, it may make sense for one or both spouses to delay to age 70. Also, divorced individuals too often overlook that they can collect spousal and/or survivor benefits for a former spouse’s earnings record. The goal for single individuals, divorced persons, and married couples should be to choose the strategy that maximizes lifetime after-tax benefits.

This article discusses some of the rules your clients need to understand, important claiming strategies and key considerations. When and how to claim Social Security can be one your client’s most important financial decisions. Social Security planning is a valuable PFP service to provide.

Overview of the System

Married and qualifying divorced individuals can collect three types of retirement benefits: worker, spousal, and survivor benefits. Single and non-qualifying divorced individuals can only claim worker benefits. Social Security retirement benefits are inflation-adjusted, investment risk free, tax-preferred, and can serve as longevity insurance. Worker and spousal benefits can start as early as age 62; survivor benefits can start as early as 60. Survivor benefits for individuals who are disabled or caring for a child can start at earlier ages. Benefits collected prior to full retirement age (FRA), currently age 66, are permanently reduced (Early Retirement Reduction). The decrease varies based upon such factors as the type of benefits, recipient’s birth year, and age that benefits start. Workers can defer benefits beyond FRA and realize significant increases (Delayed Retirement Credits) of up to 8% per year until age 70. The early reduction and delayed credits can lead to benefits deferred to age 70 to be 76% higher than those collected at age 62; this difference can be even greater when taking into account the compounding effect of cost of living adjustments. If a client waits until after FRA and prior to age 70, they need to wait until January to see the full delayed credits incorporated in their benefit check. There are no credits for delaying the collection of spousal or survivor benefits after reaching FRA. Waiting until after reaching FRA to start collecting benefits can enhance claiming options, as explained later.

Benefits are based upon life-long earnings, an average of the 35 highest years of earnings adjusted for inflation. The total benefits collected can be increased by living longer, working past age 60 and planning wisely. Benefits collected prior to FRA are also subject to an earnings limit test. In 2013, recipients must repay $1 for every $2 earned over $15,120. The earnings penalty for self-employed people is different and dependent on the hours worked per month and skill level. The earnings limit rules are also different for benefits collected in the year the recipient attains FRA; recipients repay $1 for every $3 earned in excess of $40,080 in 2013. Earning more than the income limit will cause a retiree to lose some or all of benefits in the short-term, but the Social Security Administration (SSA) will actuarially increase those benefits when the retiree attains FRA based upon the number of months of benefits forfeited. Therefore, for workers, spouses, and survivors, the earnings limit is more an inconvenience and less of a penalty.

If an individual has children or adopt children late in life, the kids can collect child benefits through age 17 (or 19 if they are attending secondary school) if the worker, spouse, or ex-spouse is collecting retirement benefits.

The Social Security Handbook, which contains over 2,700 regulations that govern benefits, the Policy Operating Manual System (POMS) that provides thousands of implementation explanations, along with numerous of helpful online calculators are available on the website, Estimated benefit data can also be easily obtained at this site. The SSA online calculators assume no real wage growth and no inflation; therefore benefits estimates particularly for younger workers can be considerably understated. The Social Security rules like our tax laws offer many planning opportunities and have traps to avoid.

Spousal Benefits

“Collect now, collect more later” is a regularly discussed strategy for married couples. It is also available for divorced individuals; however, the rules are a bit different. The concept enables one spouse to collect spousal benefits, which are up to 50% of the second spouse’s (worker’s) FRA benefits. With married couples, the worker spouse needs to file for his/her benefits before the other spouse can collect. If the worker spouse is at FRA he/she can elect to suspend the collection of benefits so that his/her worker benefits accrue delayed retirement credits of as much as a 32% bonus if they wait until age 70. This procedure in the literature is known as “file and suspend”. Only one married spouse can collect spousal benefits. If you are divorced, both the divorcee and the former can collect spousal benefits on each other’s earning record. Plus, the divorcee does not need to wait for the ex-spouse to file for benefits. Collecting spousal benefits provides supportive cash flow while postponing worker benefits and permits these benefits to increase to their maximum.

In order for your divorced client to qualify to collect spousal benefits on the former spouse’s earnings record the marriage needs to have lasted for at least 10 consecutive years and your client is:

  • Unmarried
  • Age 62 or older
  • The ex-spouse is entitled to Social Security retirement or disability benefits
  • The benefit that your client is entitled to receive based upon their own earning record is less than the benefit that he/she would receive based upon the former spouse’s record.

If a divorced spouse has reached FRA and is eligible for a spouse’s benefits and his/her own retirement benefit, he/she has the choice to claim either worker or spousal benefits. A divorcee, who applies for spousal benefits before FRA, will be forced to apply for worker benefits even if her/his ex isn’t collecting benefits. A divorcee can collect on the ex-spouse’s earnings even if the ex has remarried. There will be no impact on the retirement benefits of the ex-spouse or ex-spouse’s current and former spouses. If a divorced person remarried, he/she cannot collect spousal benefits on a former spouse’s record unless the marriage ended by death, divorce, annulment. As long as a divorced client meets the requirements, they can choose any former spouse’s record for either spousal and/or survivor benefits. If the ex-spouse has not filed for benefits, there must be at least two years’ time between the divorce the application for spousal benefits. If the time period between divorce and application is greater than two years, the SSA first pays benefits on the divorcee’s record and if the amount based upon the ex-spouse is higher, the divorcee will receive a combination of benefits that equals the higher amount of benefits subject to the early retirement reduction. The benefits formula is the similar for married couples. Both married and divorced individuals can file for spousal benefits as early as age 62. The maximum penalty for filing at age 62 is a 30% reduction, which phases out pro rata as claimant’s age approaches FRA.

Just like there is an advantage for a married spouse to wait until reaching FRA to apply, there is an advantage for a divorced client to also wait until this age. At FRA, claimants have the option to collect spousal benefits even if their worker benefits are greater. By choosing spousal benefits, the worker benefits can increase until age 70. At age 70 the recipient can consider switching to the benefits based upon their record. If the worker benefits are expected to be higher than collecting spousal benefits at FRA, switching to worker benefits at age 70 would likely be prudent. Of course, delaying requires adequate resources to cover the benefits difference period from FRA to age 70.

The “deemed filing” rules and benefits formula for individuals claiming retirement benefits before reaching FRA are a complicated; a complete explanation requires more space than this article permits. If an individual claims retirement benefits early they may be forced to take spousal benefits at a permanently reduced level if their spouse collects his/her benefits in the month which they apply. If the married spouse is not collecting benefits, the individual will not be deemed to be applying for spousal benefits and spousal benefits can be later elected. When filing early, there can be an advantage to apply before your spouse has applied.

Survivor Benefits

A primary reason to defer worker benefits is to maximize the survivor benefits for a spouse. The survivor benefit is generally equal to what the primary worker was collecting at the time of their death. If the surviving spouse has not started collecting their own benefits, they can choose to collect survivor benefits, while allowing their own worker benefits to increase in value. If the surviving spouse has already commenced collecting benefits, the survivor benefit, if higher, will be added to the worker benefit to equal the higher survivor amount. Like spousal benefits, a surviving divorced spouse can collect survivor benefits if the marriage lasted for at least 10 years and the survivor did not remarry before age 60. There are exceptions to the rules pertaining to the starting age and length of marriage rule if the former spouse is caring for natural or adopted child of the ex-spouse. There is a permanent reduction if the widow/widower is applying at an age younger than FRA. The maximum penalty for filing at age 60 is a 28.5% reduction; the penalty decreases pro rata as the applicant reaches FRA.

If the expectation is that that the survivor’s worker benefits would be greater than the survivor benefits, generally it may be wise to consider taking reduced survivor benefits and later at age 70 switch to their own worker benefits. Some survivors do better taking their survivor benefits starting at age 60 and their worker benefits at or after FRA. Other survivors do better starting worker benefits at age 62 and commencing widow/widower benefits at FRA. Survivor benefits are 100% of what the deceased was collecting at the time of death or what they would have collected if still alive. Children of a current spouse or ex-spouse can collect survivor benefits if they are under age 18 (or age 19 and still in secondary school). Also, survivor benefits received by a surviving divorced spouse do not count towards the deceased’s family maximum.

Claiming any benefits on an ex-spouse’s record should not be attempted online, it can be easily facilitated by telephone (800/772-1234) or by making an appointment to visit a local office.

Start Stop Start

Maximizing the present value of lifetime benefits should be the objective for all recipients. If a retirement benefits recipient has attained FRA, they can elect to suspend further benefits and restart them later accruing the advantage of delayed retirement credits. Recipients under age 70 can give up current benefits to add 8% per year to the benefits that collected for the rest of their lives and enhance survivor benefits. This strategy is often profitable.

The SSA permits a do-over for individuals who started to collect benefits within the last year and then decide that it was not the right decision. The individual must repay all benefits received including spousal and child benefits and they can reapply for higher benefits later.


The vast majority of recipients collect Social Security as soon as possible incurring significant early retirement penalties and missing out on the delayed retirement credits. The pay-off for a lower income earner in a two earner household, both with average life expectancies, to delay past age 66 is often marginal. However, a higher income spouse delaying from 62 to 70, collecting spousal benefits at age 66 is like investing in a 7% risk-free bond as concluded by John Shoven, director of the Stanford Institute of Economic Policy Research (reported in the WSJ 4/21/13). He estimates that an unmarried man deferring to age 67 is equivalent to earning 3.2% per year and for an unmarried woman the return is equal to 4%. Collecting spousal benefits while delaying adds significant cash flow. The later you claim, the more you get and the greater the portion of your retirement expenses will be covered by Social Security. Delaying is a particularly effective way for married men, who generally predecease their spouses by seven years, to improve their wife’s financial security. It is often beneficial for higher income couples with close to equal benefits to delay. Both spouses should consider delaying if the lower earner’s expected benefit at age 70 exceeds half of the higher income earner’s benefit at age 70.


As an example, a worker entitled to FRA benefit of $2,500 per month would need to live to age 84 for the present value of the expected benefits (PVEB) of delaying to age 70 to exceed that of starting at FRA. If the worker’s spouse or ex-spouse was entitled to approximately the same benefit and the worker collects spousal benefits at FRA switching to worker benefits at age 70 the breakeven drops to age 76. This is based upon a 4% cost of money and a 2% cost of living adjustment. At a life expectancy of 86 the excess PVEB of collecting spousal benefits would approximately $54,000. As the spouse’s benefits decrease, obviously the advantage of collecting spousal benefits declines accordingly, but collecting spousal benefits adds real value.

Calculating the PVEB can be computed with spreadsheet software or a financial calculator using the net present value function. The planner can use this data to assist clients in making more informed Social Security decisions.


Social Security planning requires an examination of many quantitative and qualitative factors such as current client resources, life expectancies, concerns about the future of Social Security, income tax implications, and projected returns on retirement assets, expected present value of benefits (PVEB) under the different scenarios, inflation and the impact of cost of living adjustments. Spousal and survivor’s benefits can add hundreds of thousands of dollars in cumulative benefits. Income taxes were not covered in this article, but they can be a significant factor affirming the advantage of postponing the start date for benefits. Financial planners can assist their clients make better decisions pertaining to claiming benefits. By working with your clients and educating them about their options, planners can help their clients maximize the value of their Social Security.

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