Hey guys, Mike Frontera here back with another Retirement Theory Video!
So we’re going back to this recurring topic of lesser-known Social Security benefits, again, putting the spotlight on areas with a ton of confusion and misinformation. Now, this is the second of three videos in the series, and I’d say it’s the one that surprises people the most, in terms of consequence and planning opportunity.
So today’s spotlight is on (drumroll please)… Survivor benefits! Now survivor benefits are those that become payable after the death of a worker who has paid into the Social Security system. These survivor benefits often make up a massive piece of your retirement income plan. In fact, they can completely change what claiming strategy is the most optimal for you and your spouse to take. The thing is, they’re often relegated to an afterthought, if they’re even considered at all, and that can cost you a lot of money.
Now, the rules behind survivorship benefits, can be somewhat thorny and convoluted, so we’re just going to focus today on some basic strategies just to help illustrate the impact of these benefits. I will also provide some resources you can check out in the description if you’d like to learn more.
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Alright, now let’s talk about what happens to a couple’s Social Security Benefits when one spouse passes away. Well, assuming both spouses are older than full retirement age (or FRA as I’ll be calling it), the surviving spouse will generally continue receiving their own benefit, but if it’s higher, they will receive the amount of their deceased spouse’s benefit.
While that may seem like a small detail, it can have a tremendous impact on the total amount a couple receives during their lifetime. As such, the survivor benefit needs to not just be considered at death, but way ahead of time when retirement benefits are first being claimed.
So let’s look at a couple situations, and I’ll show you what I mean:
Here’s our married couple, Brad and Angelina.
Now Brad is somewhat older than Angelina. He just turned 61 and she’s currently 46. Both of their Social Security benefits at FRA are $2500 per month, and to make things easier, we’re removing cost of living inflation adjustments.
Remember, conventional wisdom would often say that to maximize benefits you need to delay your claim as long as possible. But for Brad and Angelina, delaying could very well be a huge waste of money! Why?
Well, if they both claimed at 70, their benefits would each be 24% higher than their benefit at FRA, due to delayed retirement credits, so they would both receive $3100 per month. But look at this. By the time Angelina is 70 and starts her benefit, Brad is already 85 years old. So assuming Brad dies shortly thereafter, Angelina drops down to just one $3100 monthly benefit. The same amount she would have received had she started getting her own benefit at 62. In other words, her 8 years of waiting have yielded her virtually nothing in benefits.
What if instead, Brad claimed at 70, but Angelina began receiving her benefit at 62. Because she claims early, she only gets 75% of her $2500 benefit, or $1760 per month. Fast forward again to when she is 70 and Brad is 85. Assuming Brad dies shortly thereafter, Angelina now takes over Brad’s same benefit of $3100 per month as it is the higher of the two benefits. The difference being, she received 8 years of her $1760 per month benefit, that she totally missed out on before! Even without any cost of living adjustments, that’s a difference of over $160,000!
The key point is this: For most couples, the higher benefit will span both couple’s lifetimes whereas the lower benefit will drop off at the first death. In Brad and Angelina’s case, their mistake was delaying her benefit, not realizing that it would drop off once either her or Brad passed away. She would actually only benefit from her delayed claim as long as both her and Brad remain living. So for them just to break even on Angelina’s delayed claim, Brad would need to live to be about 96.
Now remember before when I mentioned that when a spouse dies, the survivor can choose the deceased spouse’s benefit OR their own. Well actually, they can sometimes get both. That is, the surviving spouse has the option to receive only the survivor benefit and switch to their own retirement benefit later or vice versa. Why would they do that? Well, let’s go back to Brad and Angelina!
OK, in this case, let’s assume that Brad’s benefit was $1500 per month at FRA and Angelina’s was $2500. For this case, we’re going to assume that Brad died at 79 years old when Angelina was just 64. To keep it simple, we’ll say Brad claimed his benefit at FRA and so he was receiving his $1500 per month. After his death, Angelina could decide to take Brad’s survivor benefit, leaving hers to grow until she turned 70.
For survivorship purposes, Social Security would reduce Brad’s $1500 benefit by about 12% because Angelina herself was not yet FRA. But any benefit is better than nothing, because she would be getting paid while her own Social Security benefit increased each year until she turned 70. At that point she could switch from Survivor benefits to her own increased retirement benefit! Again, even without considering any cost-of-living adjustments, Angelina receives over $1300 per month for 6 years, nearly $100,000 in survivorship benefits, while waiting for her own benefit grow.
By the way, Survivor benefits aren’t just for spouses. Survivor benefits can be paid to ex-spouses too, and in some cases children, and even to a parent who is a financial dependent of a deceased worker. That said, not all survivorship benefits aren’t paid out automatically. It is up to you to be informed about the rules and what you’re entitled to.
So, do you have questions for me? Come visit me at www.retirementtheory.com or send me an email at firstname.lastname@example.org. Did you click subscribe on this video or follow me on Facebook? I think that you should. You’ll continue to see videos like these on everything retirement planning. Once again, thank you for joining me, we’ll see you next time.