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 How about this idea for a new reality TV show: “Survivor: Maximize
your Social Security.” Rather than getting voted off the island,
contestants lose when they fail to get the most out of Social
Security’s survivor benefit - one of the government program’s most
important features for married couples.
Here is how our reality show works. When one spouse dies, the
survivor (typically, but not always the woman) has the option to
take the larger of two benefits: her own or 100 percent of her late
spouse’s benefit. The game sounds simple, and for many couples, it
is.
But in many cases, a widow should not just take the larger of the
two benefits. This is where our reality show gets interesting. A
research paper published in the current issue of "The Journal of
Retirement" illustrates why it sometimes makes sense for a widow to
take her own benefit for a while, switching to the survivor benefit
later. Or it may make sense to start with a survivor benefit and
switch later to her own benefit.
The analysis comes from William Reichenstein, a professor of
investment management at Baylor University, and William Meyer, a
long-time veteran of the financial services industry. They are the
founders of Social Security Solutions, which develops software to
help guide Social Security claimants in maximizing their benefits.
The survivor benefit is one of the best illustrations of how Social
Security really is “social insurance.” Payroll taxes paid into the
program buy income protection for your spouse in case of your death
- somewhat like life insurance. And survivor benefits are not
limited to spouses. In some cases, surviving children who are
unmarried can also can receive a benefit, as can dependent parents.
One-time, lump sum payments can be made to spouses and children.
SURVIVOR STRATEGIES
Survivor strategies can be especially important for women in the
later years of life. One Social Security check stops coming when one
spouse dies. For heterosexual couples, that typically is the man. At
an advanced age, savings often are depleted and the option of
generating income from work typically is foreclosed. As a result,
women are 80 percent more likely to live in poverty than men after
age 65, according to a recent report by the National Institute on
Retirement Security.
The survivor rules underscore the ongoing need for thoughtful
planning by couples. “Planning is just as complex now, if not more
so,” argues Meyer. That is true even after the recent phasing out of
Social Security’s file-and-suspend strategy and elimination of the
ability to file a restricted application for people born after Jan.
1, 2015, under the Bipartisan Budget Act of 2015. (That legislation
addressed only retirement benefit choices; survivor benefit rules
were not affected).
Often, the strategy actually is straightforward. If the surviving
spouse is age 70 or older, she should take the larger of the two
benefits - her own or that of her spouse. “I suspect that covers
about half of all couples,” Reichenstein says.
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But in some cases, married individuals have options for increasing
either a survivor benefit or their own by taking advantage of Social
Security’s delayed filing credits. You get about 8 percent less for
every year you file early (starting at age 62), and the same
increase for every year you wait until age 70 – the last year for
which additional credits are available.
The smartest strategies vary depending on the surviving spouse’s age, life
expectancy and the Primary Insurance Amount (PIA) for each spouse (PIA is based
on a Social Security formula used to translate your lifetime earnings into
benefits).
CRUNCH THE NUMBERS CAREFULLY
Consider a hypothetical couple, Mike and Ann. Ann is 66 years old when Mike
dies. That means she is at her full retirement age (FRA) and entitled to her
full benefit, which is a monthly initial PIA of $2,000. Mike had begun his
benefits at FRA and was receiving $2,200 per month when he passed away.
Reichenstein and Meyer recommend that she file for a survivor benefit ($2,200),
and wait to switch to her own benefit until age 70; it will have grown by then
to $2,640 monthly. That means she will get about $5,280 more in annual income
beginning at age 70, and she will benefit from larger annual cost-of-living
adjustments in dollar terms.
Now let’s reverse the situation. If Mike was the lower earner, the best strategy
really depends on Ann’s life expectancy. If Mike’s benefit at death was only
$1,500, Ann could start her own retirement benefit at $2,000 and stay at that
level for the rest of her life. An alternative would be to start with the $1,500
survivor benefit at 66, and switch to her own benefit at 70 ($2,640).
Reichenstein and Meyer calculate that Ann will receive higher cumulative
lifetime benefits as long as she lives to at least 73 years and two months.
Meyer offers the caveat that married couples really need to run the numbers
carefully to reach an optimal decision. In particular he notes it is important
to make calculations using the correct FRAs, which can vary by a few months for
retirement and survivor benefits due to a quirk in the Social Security rules.
He also warns that couples should be aware that the Social Security
Administration will not reach out to you with guidance. “When someone passes
away, they aren’t going to call you and say ‘Hey, you really should switch over
to your own benefit.’”
(Editing by Matthew Lewis)
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