Deciphering Social Security survivor benefit rules

A financial adviser from South Carolina reached out to me recently for help sifting through the numerous Social Security regulations affecting potential benefits for his recently widowed client.

“This is probably the most complex situation I have run across,” Lee Carter of Armstrong Wealth Management Group in Florence, S.C., wrote to me in an email. “I spent two to three hours researching and giving the client questions to email to her Social Security contact, but I never felt comfortable with the answers she was given.”

Sound familiar?

Here are the facts of the case. Feel free to play along with this real-life version of the board game Clue to see if you can identify the right claiming strategy.

The husband claimed his reduced Social Security retirement benefits at age 62 and died the same year. The widow turns 60 this year, the earliest eligible age for claiming reduced survivor benefits.​

She works and earns about $45,000 per year, and plans to continue working. She is eligible for her own retirement benefit of about $1,440 per month at her full retirement age of 66 and 8 months.

Bottom line: The client can claim reduced survivor benefits as early as this year or her own reduced retirement benefit beginning as early as age 62. And because retirement benefits and survivor benefits represents two different pots of money, she could collect one type of benefits first and switch to the other later. But earnings restrictions could significantly reduce her benefits if she claims either one before her full retirement age.

The key questions are: When should she claim benefits; how much could she collect; and should she switch benefits later?

The husband’s full retirement-age benefit amount was $2,335 per month but because he claimed four years early, he received just $1,726 per month. In general, when a worker starts receiving retirement benefits before full retirement age, the maximum survivor benefit is limited to what he would receive if he were still alive, according to the Social Security website.​

When should the widow claim benefits? Not now.

If she claims any type of Social Security benefit before her full retirement age, she would forfeit $1 in benefits for every $2 earned over $17,040 in 2018. In this case, her $45,000 annual salary would reduce her Social Security benefit by about $14,000 per year. ($45,000-$17,040 = $27,960/2 = $13,980). In addition, a portion of her Social Security benefits would be taxable.

If she claimed survivor benefits this year at age 60, they would be worth just 71.5% of her late husband’s FRA amount or $1,669 per month equal to about $20,000 per year. The earnings cap would wipe out about $14,000 in benefits, leaving her with just $6,000 per year.

How much would she receive?

If she waits until her full retirement age, when the earnings restrictions disappear, she can claim a larger benefit. For people born from 1955 through 1962, the age to collect full survivor benefits is different than the age for full retirement benefits.

Although her survivor benefit would normally be limited to the amount her husband claimed before he died ($1,726), there is an exception known as the minimum widow’s benefit. That rule says if a surviving spouse or eligible surviving ex-spouse claims benefits at full retirement age or later, she would receive the larger of what the deceased worker was collecting ($1,726) or 82.5% of his full-retirement-age amount ($1,926 per month).

Survivor benefits are worth the maximum amount if collected at the surviving spouse’s full retirement age. They do not qualify as delayed retirement credits. But her own retirement benefits will continue to grow by 0.66% per month for every month she postpones claiming them beyond her full retirement age of 66 and 8 months, up to age 70. Her estimated retirement full-retirement-age benefit of $1,484 would increase by 26.4% benefit to $1,875 at 70.

Although her estimated retirement benefit at 70 is currently less than she could collect in survivor benefits, every year she continues to work means her future retirement benefit could increase if her current earnings replace one of the lower-earning years used to calculate her benefit. Social Security benefits are based on the top 35 years of indexed earnings.

If the widow’s own retirement benefit — plus any delayed retirement credits — results in a larger amount than her survivor benefits, she could switch to her larger retirement benefit at 70.