Social Security benefits can be pretty darn confusing. But sometimes, what a Social Security representative tells prospective beneficiaries and what those consumers hear may be two different things. As memorialized in the 1967 movie “Cool Hand Luke,” what we've got here is a failure to communicate.
For example, financial adviser James Williams of FMG Financial Management Group in Lancaster, Pa., emailed me about his new clients. The husband, John, is 64 and began collecting reduced Social Security benefits early at 62, before engaging Mr. Williams as his adviser. John's wife, Mary, who is 50 and still working, is the higher-earning spouse.
According to Mr. Williams, John and Mary visited their local Social Security office two years ago to determine whether he should claim benefits early at 62. The couple said the Social Security representative told them that because of the couple's age difference and because there are no dependent children, Mary would not be entitled to survivor benefits if John died first.
I sincerely doubt the representative said that. Either the couple received a truncated answer or they only understood part of what they heard.
I imagine the SSA representative tried to point out that because Mary is the higher-earning spouse, her Social Security retirement benefit may be larger than John's benefit. Normally, if a person is entitled to two benefits, Social Security pays them the larger benefit, but not both.
However, because survivor benefits and retirement benefits represent two different pots of money, an individual could claim one type of benefit first and switch to the other later if it would result in a bigger payment.
It's true that if John died today, Mary could not collect a survivor benefit because at age 50, she is too young. If they had a minor dependent child at the time of John's death, the child could collect a survivor benefit and so could Mary, regardless of her age, until the child turned 16. The child's benefit would continue until he or she turned 18 (or 19 if still in high school).
However, even without a minor child in the house, Mary could collect a reduced survivor benefit as early as age 60. But it would be worth only 71.5% of John's full retirement benefit.
Or, Mary could wait until her full retirement age of 67 to collect a higher survivor benefit, but it would still be worth less than 100% of John's full retirement age benefits. That's because he collected reduced benefits early. That's one of the biggest consequences of collecting Social Security early — condemning a surviving spouse to a smaller survivor benefit.
However, there is a special rule in cases where a worker collects reduced retirement benefits before his or her death, but the surviving spouse waits until her full retirement age to claim survivor benefits. The rule allows the surviving spouse to collect either the amount the deceased received before his death — 75% in this case— or 82.5%, whichever is greater. In Mary's case, she could collect 82.5% of John's full retirement age benefit if she waited until her full retirement age to claim survivor benefits.
But the survivor benefits won't grow any larger if Mary waits beyond her full retirement age to claim them, unlike her retirement benefits. Mary's retirement benefits would earn delayed retirement credits worth 8% per year for every year she postponed collecting them beyond her full retirement age of 67 until age 70. That would boost her benefit to 124% of her full retirement age amount if she waited until 70 to claim them.
So if John died before Mary reached her full retirement age, she could collect a survivor benefit first and switch to her own higher retirement benefit at age 70. However, any Social Security benefit she collected before her full retirement age — whether a survivor or retirement benefit — would be subject to earnings cap restrictions.
The bigger question that Mr. Williams asked me is was it the right decision for John to claim reduced Social Security benefits early? Given that the couple's plan to invest John's Social Security benefits, it was probably a prudent move. That would give the couple an additional 19 years of Social Security benefits before Mary reaches her full retirement age.
Although Mary has a 401(k) account, she has neither a pension of her own nor is she entitled to any of John's pension after his death, Mr. Williams noted in his email. So by investing John's monthly Social Security benefits, the couple can create their own survivor benefit for Mary.
(Questions about Social Security? Find the answers in my ebook.)
