I received a sad phone call from a friend the other day, asking for Social Security claiming advice for his sister and her husband. The husband had just received a diagnosis of lung cancer, and his prognosis is not good.
Normally, I urge married couples to coordinate their Social Security claiming strategies and to focus on maximizing the retirement benefit of the higher-earning spouse as a way to ensure the largest survivor benefit for whichever spouse remains.
Maximizing retirement benefits usually means delaying benefits until age 70, and that assumes the higher-earning spouse will live at least that long.
But my friend's sister and husband are facing a much different situation, so I altered my advice accordingly.
I suggested that the husband, who turns 62 this month, claim his Social Security retirement benefits as soon as possible, even though the benefits would be permanently reduced by 25%. Claiming his benefit early also means that the survivor benefit for his wife would be smaller than if he had waited until his full retirement age of 66 or later to claim benefits.
But due to his cancer diagnosis, which has left him unable to work, I also suggested that he immediately apply for Social Security disability benefits. There is a five-month waiting period before disability benefits can commence after the date Social Security determines the disability began. So in a best-case scenario, his disability benefits would not begin for at least six months — assuming he lives that long.
His disability benefit is roughly the same amount as his full retirement age benefit of about $2,100 per month. His reduced retirement age benefit for claiming Social Security at 62 is about $1,600 per month.
If he is ultimately approved for disability benefits, it could boost his monthly benefit to the higher level (if SSA determines his disability began before he started receiving retirement benefits), thereby increasing the potential survivor benefit for his wife.
The bigger challenge is when the wife should claim her Social Security benefits, which are substantially smaller than her husband's. She turns 62 early next year and is no longer working. Theoretically, she could claim reduced benefits as soon as she is eligible, but that could further reduce the amount of her survivor benefit.
Survivor benefits are normally worth 100% of what the deceased worker collected or was entitled to collect at the time of death if the surviving spouse is at least full retirement age at the time; less if she collects earlier.
But there is a special minimum benefit rule for survivors when the worker collects reduced benefits early. If the surviving spouse is at least full retirement age at the time she claims survivor benefits, she is entitled to the larger of what the deceased worker claimed or 82.5% of his full retirement age benefit, also known as his primary insurance amount or PIA.
I recommended that the wife delay claiming Social Security to keep her options open as her retirement benefits and her potential survivor benefits represent two different pots of money that she can claim at different times.
If she claimed retirement benefits now, they would be permanently reduced for early claiming. And once her husband died, she would automatically be switched to survivor benefits, which also would be reduced if she was younger than full retirement age at the time.
Instead, she might want to hold off collecting Social Security for a while to give her more flexibility.
If her husband dies in the next few years, she may want to claim her reduced retirement benefit first. Then once she reaches her full retirement age of 66, she could switch to her full survivor benefits. Because survivor benefits do not earn delayed retirement credits, they never grow larger than when collected at full retirement age (aside from annual cost-of-living adjustments).
If her husband dies before being approved for disability benefits and she was at least full retirement age at the time she claimed survivor benefits, she would receive benefits based on 82.5% of his PIA rather than the 75% benefit he received for claiming Social Security retirement benefits at the earliest age of 62.
But here's the real challenge for financial advisers: many Social Security software programs do not allow you to assume a life expectancy younger than 70. Although software is often crucial to developing and comparing various Social Security claiming strategies, if the program doesn't allow you to enter appropriate life expectancy assumptions, you may have to think outside the black box.
This article has been updated to indicate there is a five-month waiting period before disability benefits begin. The waiting period is five full months, meaning that it will take six months before benefits are disbursed.
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