How to Maximize Social Security Survivor BenefitsSubmitted by Miller Premier Investment Planning, LLC on June 9th, 2016
When one spouse passes, the surviving spouse has the option to take the larger of two social security benefits: his/her own or their late spouse's benefit. It sounds simple enough -- take the larger benefit. However, the surviving spouse needs to do some homework first before making this critical decision.
William Reichenstein, a professor of investment management at Baylor University and William Meyer wrote a research paper published in "The Journal of Retirement" on the subject. They found that it may make sense for the surviving spouse to take their own benefit for a while and then switch to the survivor benefit later. On the other hand the opposite strategy may be in order depending on certain factors.
Social Security Survivor Maximization Strategies
Social Security survivor maximization strategies can be extremely critical in the success or failure of a surviving spouse's ability to maintain their standard of living after losing their loved one. One social security check stops coming when a spouse passes away and the majority of the time it is the wife who survives the husband. In later stages of life savings are often limited and the ability to earn an income is nonexistent. As a result, women are eighty percent more likely to live in poverty after age 65 according to the National Institute on Retirement Security.
Most of the time the solution is straightforward. If the surviving spouse is 70 or older, she/he should take the larger of the two benefits. Reichenstein estimates that should cover about half of all couples.
However in other situations, surviving spouses may be able to increase their lifetime payouts by taking advantage of Social Security's delayed filing credits. Starting at age 62 you receive about eight percent more for every year you delay taking benefits until age 70 which is the last year for which credits are given. This is true of your own benefits as well as survivor benefits.
The most critical factors that determine which strategy is best to maximize lifetime benefits are the surviving spouse's age, their life expectancy, and the Primary Insurance Amount (PIA) for each spouse.
Crunching the Numbers
To illustrate how this works lets look at a hypothetical couple, Mike and Rhonda. Rhonda is 66 years old when Mike dies. She is at her full retirement age (FRA) and entitled to her full benefit which is $2,000 per month. Mike had begun his benefits at FRA and was receiving $2,200 per month when he passed away. In this case she should file for the 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. Based on normal life expectancy she will likely collect over $100,000 more in benefits over her lifetime using this approach.
Now let’s reverse the scenario. If Mike was the low earner, the best strategy really depends on Rhonda’s life expectancy. If Mike’s benefit at death was only $1,500, Rhonda 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). This is most likely the better option provided Rhonda is healthy, has a healthy lifestyle, and has longevity in her family history which would suggest a normal to above average life expectancy. Rhonda will receive higher cumulative lifetime benefits as long as she lives to at least 73 years and two months which is what we call the break even point.
Married couples really need to run the numbers carefully to find the best strategy as this could literally be a $100,000 decision. 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. The Social Security Administration is not going to reach out to you and tell you how to do this so you either need to figure this out for yourself or utilize the services of a competent certified financial planner practitioner specializing in retirement planning and social security maximization. At Miller Premier we utilize social security maximization strategies and software to help our clients achieve maximum income and retirement security. You can schedule your own complimentary strategy session by clicking on the orange button below to select a date and time that is convenient for you.