For widows and widowers with their own work history, there are some quirks that are important to know when it comes to Social Security retirement benefits and survivor’s benefits.
Most people expect both benefits to start at 62, but survivor’s benefits can actually begin as early as age 60. For a survivor whose spouse earned more, the strategy of applying for survivor’s benefit only (in effect, deferring their own retirement benefits) can lead to a better long-term income plan because of how delayed retirement credits impact retirement benefits.
For example, if survivor benefits are $1,100 per month and retirement benefits are $1,000 per month then applying for survivor’s benefits immediately brings in the most amount of money into the household.
Continuing this example, if this survivor delays their retirement benefits until 70, there will be a 24% increase (on top of any cost-of-living adjustments or COLAs). At age 70, the monthly retirement benefit can be elected, and the survivor would receive $1,240 per month.
Unfortunately, this strategy only works in one direction because of the “deemed filing” rule that applies to Social Security benefits when they are applied for while younger than full retirement age (“FRA”). For most people, FRA is age 67. However, those born before 1960 have a full retirement age that is less than age 67.
When a survivor applies for their own retirement benefit prior to full retirement age, the Social Security program deems the application to be for all benefits available and will pay the highest benefit amount available from multiple sources.
Using the same figures from the example above, a survivor applying for their retirement benefit would receive $1,000 per month with respect to their own work history and an additional $100 per month in survivor’s benefits because it is more than their retirement benefit amount. This has the same outcome in terms of cash flow, but the applicant will not receive any delayed retirement credits and will not have increases to their benefit (other than the cost-of-living adjustments that apply to all Social Security beneficiaries).
On top of the deemed filing complication, there is also a retirement earnings test that will apply to Social Security benefits elected prior to full retirement age. This “test” is a formula used by Social Security that reduces any benefits based on the beneficiary’s earned income. Earned income is income like wages or salary, it is not investment income (dividends, capital gains, interest), nor does it apply to rental income or distributions from retirement plans.
This earnings test will limit the monthly benefit paid to the beneficiary in months where they earn more than the retirement earnings test. These benefits are not gone forever, nor are they lost – these withheld dollars are paid as an additional benefit on top of the Social Security benefit after the full retirement age is reached. The retirement earnings test has two limits, a lower limit during most years and an increased limit in the year that the Social Security beneficiary turns full retirement age.
Doug “Buddy” Amis, CFP, is President, CEO and Owner of Cardinal Retirement Planning. Based in Durham, North Carolina, Doug and his team at Cardinal Retirement Planning provide comprehensive investment advising and management, financial planning, and tax consulting.
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This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
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