Women should decide Social Security strategy

Many financial advisors express frustration over their inability to get wives involved in financial planning. Whether it’s lack of interest by the wife or dominance in conversations by the husband, it is fairly common to see one-sided decision-making by married couples. I find this not to be a problem for single women because they are naturally making decisions for themselves, assuming they do not have a general lack of interest in their financial well being even when single (but that’s another problem).

When it comes to Social Security decisions for couples, it would seem natural that the husband would take the lead. In the majority of marriages the husband is older, which means his Social Security decision comes first, and he’s also the higher earner, which means his benefit will be primary. Of course, there are exceptions to this description, but even then poor decisions may still be made.

The wife’s benefit—if there is one—is almost an afterthought, since it often doesn’t contribute very much to their joint income. But husbands do not always make the best decisions for the couple. A new paper, How Does Social Security Claiming Respond to Incentives? Considering Husbands’ and Wives’ Benefits Separately has found that husbands’ benefit claiming is inconsistent with maximizing lifetime benefits for the couple.

Husbands tend to respond to the actuarial incentives built into their own retired worker benefit formula, but not to the incentives built into the spouse and survivor formulas, the report says. The result is lower lifetime benefits for their wives. The reduction is greater for higher earners than for average earners.

Women are more worried about retirement. The Institute for Women’s Policy Research found that:

  • 58% of women interviewed were concerned they would not have enough to live on in retirement, compared with 43% of men.
  • 47% of women lacked confidence that their resources would last throughout their retirement, compared with 35% of men.
  • 51% of women worried they would not be able to afford retiree health care, compared with 44% of men.

Women love guaranteed income. A 2010 Boston Consulting Group study found that women think differently than men do about money and wealth. Women do not seek to accumulate money, but see it as a way to care for their families, improve their lives, and find security. Women care less about assets and more about income—which is why, I encourage you to focus on income in their later years as opposed to breakeven age.

Women rely more on Social Security. In 2010, 46% of elderly unmarried women (including widows) relied on Social Security for 90% or more of their total income. Now, it’s true that an important part of Savvy Social Security planning is arranging other sources of income in retirement so widowed clients will not be so dependent on Social Security. Still, Social Security is one of the few sources of income that is inflation-protected and guaranteed for life (yes I am one of those who believe the program will continue to exist; however, benefits do need to be modified so it is actuarially sustainable for those who are young today).

It probably will be an important component of most widows’ income in old age, especially if they live a very long time. In any case, women will always see Social Security as income they can rely on, which can’t be said about income sources that are not guaranteed.

For those making a pension choice, they notice that the spouse needs to sign off on that choice. Why? Because of the survival benefit. Social Security does not have that feature. This is why I try to encourage wives to take the lead in making Social Security decisions for the family. The Institute for Women’s Policy Research has proposed decoupling the husband’s claiming age from the wife’s potential survivor benefit so her income isn’t dependent on decisions he makes in his 60s. But until that happens, the age at which a husband starts his Social Security benefit will directly affect his wife’s survivor benefit.

Both spouses need to understand that for married couples, his life expectancy doesn’t matter—if his benefit is higher than his wife’s he should always delay benefits. If he dies early, she will receive the higher survivor benefit for a longer period of time, making his own benefit less relevant. If he lives a long time, he will outlive the breakeven age and his own benefit will provide more income to the couple throughout his life. When the decision is laid out this way, most couples get it.

Article by Elaine Floyd, CFP®, Horsesmouth, with some edits for this blog.

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