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 receive a benefit, as can dependent parents. One-time, lump sum payments can be made to spouses and children.
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.
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).
“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.”
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.
“Meyer offers the caveat that married couples really need to run the numbers carefully to reach an optimal decision.”
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.’"
The opinions expressed here are those of the author, a columnist for Reuters. (Editing by Matthew Lewis)