When your spouse dies, your financial situation can change overnight. One of the most important things to get right is survivor benefits from Social Security.
You might be able to file for your spousal survivor benefits immediately while your own benefits keep growing until the age of 70. In other cases, it could benefit you to file immediately for your own benefits while your survivor benefits keep growing until your full retirement age.
This tactic, which is officially called a restricted application, used to be available to all couples. But Congress phased out the maneuver for people born after Jan. 1, 1954. However, it left a big exception: Widows and widowers can still do it. Maximizing the benefits of the surviving spouse “can make a huge difference in your future living standards, especially if you live a long time,” says Laurence Kotlikoff, a Boston University economist who sells Social Security maximization software.
If a couple is more than 70 when one spouse dies, the choice is simple. They’re already receiving their Social Security benefits, and the survivor is effectively entitled to the bigger of the two checks.
The complexity comes when one spouse dies before the age of 70. This is more common than you might think. According to an analysis of Social Security data by Mike Piper, a St. Louis certified public accountant, almost 15% of 60-year-old men and 10% of 60-year-old women won’t make it to age 70.
William Reichenstein, research director for Social Security Solutions, which also sells maximization software, has had to use his knowledge of survivor benefits in his own family. Two of his siblings died before the age of 70.
In the case of an older brother who died at 65, Reichenstein advised the widow to not start the larger survivor benefit right away. Instead, she first took a smaller benefit based on her own work history before switching to a much bigger survivor benefit at her full retirement age of 66. If she lives beyond 77 and one month, she will come out ahead.
“It pays for her to wait” for the survivor benefit, Reichenstein says.
How do you figure out whether to file first for survivor benefits or your own benefits? In general, you want to wait as long as possible for the benefit that “has the potential to get the biggest,” says Piper, who recently wrote the book After the Death of Your Spouse. Piper also operates a website that can calculate the right claiming strategy for widows or widowers.
It’s an easy decision to mess up. Piper regularly advises sophisticated do-it-yourself investors as a CPA, and they frequently make the wrong claiming decision after a spouse dies. For example, he has clients who are determined to wait until 70 to claim their own Social Security benefits to make the monthly payment as large as possible, but they are unaware they also could be claiming a survivor’s benefit in the meantime without lowering their own benefit.
The Social Security application process itself doesn’t help. Kotlikoff gives a hypothetical example of a 62-year-old widow who is entitled to immediately claim an annual survivor’s benefit of $28,946 based on her dead husband’s earnings. By doing so, she could allow her own benefit, currently $20,444, to keep growing to age 70 when it would reach $36,000. At that age, she would drop her survivor’s benefit and switch to her own higher benefit.
If, however, the widow simply told Social Security to give her all available benefits, it would have huge consequences, according to Kotlikoff. Social Security would give her a reduced early retirement benefit plus a reduced survivor benefit that would total $28,946. But her own benefit wouldn’t grow any further. So at age 70, she would get $28,946 for the rest of her life instead of $36,000 under the other strategy, he says. He calculated that the mistake would cost the widow $185,813 in lifetime benefits.
Adding to the confusion, Kotlikoff says the Social Security Administration frequently gives wrong advice to consumers and he recommends that survivors give all claiming instructions in writing or tape their calls with Social Security representatives to establish a record if something goes wrong.
A 2018 report from the Social Security’s Office of the Inspector General concluded that the agency had underpaid about $131.8 million to 9,224 widows or widowers who weren’t informed that they could delay filing for their own benefits until age 70 to increase their benefits.
In response to that audit, the Social Security Administration said it had made a number of changes, including reminding employees to discuss the effect of delaying applications for retirement insurance benefits for widows and widowers. Still, a statement from the administration noted: “The decision belongs solely to the individual who may make a choice that does not necessarily maximize benefits.”
If the widow or widower is continuing to work, Social Security’s earnings test is another complication. Before full retirement age, Social Security generally will subtract $1 of benefits for each $2 you earn in excess of $21,240 in 2023. This isn’t usually a problem, since Social Security will bump up the benefit at full retirement age to reflect the lost payments, and recipients will get that higher benefit for the rest of their lives. But it is a big deal for a widow or widower who is planning to receive that benefit for only a few years and then switch to another benefit.
Piper gives an example of a married couple who each has a full retirement age of 67. The wife has a higher earnings history. She will receive $2,600 a month at her full retirement age. The husband will receive $1,000.
The husband dies before the wife reaches age 60, and he never filed for his retirement benefit. She could file for his benefit at age 60, which would be reduced to $715 a month because she is filing early.
However, because she is still working and earns more than $38,400, all her survivor’s benefit will be wiped out by the earnings test.
Instead of claiming now, the wife stops working at age 64 and waits until then to claim her survivor’s benefit. Because she has waited, the benefit will be adjusted upward to $877 a month and she will get that amount until she turns 70. At that age, she switches to her own benefit, which has grown to $3,224 a month.
If instead she had filed for the survivor’s benefit at 62, she would have received nothing until age 64 because of the earnings test. Then she would have received $715 a month until age 67 when her benefit would rise to $877. In total, she would receive $5,832 less by this strategy.
“It’s too complicated for many people to figure out on their own,” Piper says of claiming decisions for widows and widowers. “That’s just the reality.”
This article was originally published in Barron’s on January 30, 2023, and was written by Neal Templin.
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