It’s unfortunate, but many people don’t understand how early Social Security benefits can come back to haunt them — and their loved ones. According to a 2021 Nationwide Retirement Institute® survey, 45 percent of U.S. adults believe they can file early for reduced Social Security benefits and then have them restored to a higher level once they reach full retirement age. This is not correct. If you apply for Social Security early, you will receive lower benefits for the rest of your life.
Another common – and potentially costly – error is when married couples fail to consider the implications for their partner. If your spouse relies on your benefits to make ends meet, you should be aware that your decision may have an impact on their future financial security if you die before them.
In reality, when one spouse dies, the survivor’s Social Security income decreases significantly. This is the amount of money that most people require to cover their basic living expenses. As a result, it is critical to consider taking steps to maximize survivor benefits.
An Example of How Survivor Benefits Work in Social Security
Here’s an example of how this might play out:
Bob, 66, and June, 62, are a married couple who have recently retired and have both decided to begin receiving Social Security benefits right away. Bob, who has reached full retirement age, will receive $3,000 per month, and June will receive $1,900, for a total monthly Social Security benefit of $4,900.
If Bob died, June’s monthly Social Security retirement income would be reduced by nearly 40%. While she would continue to receive her husband’s $3,000 monthly survivor’s benefit, her own benefit would be eliminated. As a result, her Social Security income would fall by $1,900 per month, from $4,900 to $3,000 per month.
Unfortunately, the reduction in benefits is unavoidable. However, many couples’ decision to file for Social Security early can exacerbate an already difficult situation for surviving spouses. In our hypothetical case, Bob was claiming Social Security at the age of full retirement. But first, let’s change Bob’s age to see how it affects the equation. Instead of retiring at the full retirement age of 66, suppose Bob retires at 64 and decides to begin collecting Social Security benefits early. More than half of people do this, and many are unaware of the potentially devastating impact it can have on their spouse.
Assuming Bob’s full retirement age is 66, claiming at 64 means that instead of a monthly benefit of $3,000, his benefit is now around $2,625. What if he retires even sooner? Claiming at the age of 62 would reduce his monthly Social Security benefit to around $2,250. These cuts are permanent, and they would reduce June’s survivor benefit as well. That is definitely something to consider before taking your own Social Security benefit.
It’s worth noting that if you file your claim early, your surviving spouse is entitled to either your reduced monthly benefit or 82.5 percent of your full retirement age benefit, whichever is greater. In either case, your partner’s benefits will be reduced.
That’s why it’s critical to understand that your decision on when to file for Social Security is about more than just your personal benefits. And, if your surviving spouse is unable to make ends meet, what are the financial ramifications for other family members who may be called upon to provide care in the future?
How to Get the Most Out of Your Spouse’s Survivor Benefit
So, how can you make the most of your spouse’s Social Security survivor benefit? The answer is summed up in a single word: Wait. You earn an 8% delayed retirement credit for each year you wait to claim Social Security after reaching full retirement age. Those annual increases continue until you reach the age of 70, at which point your Social Security benefit is at its maximum. In our hypothetical example, if Bob waited until he was 70 to claim, his Social Security check would increase to $3,960, compared to $2,250 if he claimed as soon as he could. After Bob dies, the increased monthly benefit will become June’s survivor’s benefit. June would thus receive an additional $960 per month for the rest of her life.
It’s critical to recognize that deferring Social Security benefits has a cost, namely the loss of Bob’s Social Security income from age 66 to 70. Foregoing $3,000 in monthly income for four years equals $144,000. That’s a substantial sum, but it may be worthwhile if June lives into her 80s or 90s, which is not uncommon for women who maintain good health habits. This trade-off could make a lot of sense for the following reasons:
- Couples who have the means to postpone filing without depleting their savings to the point where long-term financial goals are jeopardized.
- Couples with significant age differences
- Couples with at least one spouse who has exceptional health or a family history of longevity
If maximizing your spouse’s survivor benefits is important to you, you must find a way to generate the income required to allow you to postpone taking Social Security and allow your benefit to grow. You can bridge this gap by collaborating with a financial professional. This could include solutions such as annuities or life insurance, which can provide both guaranteed income and death benefits that can be used to replace future Social Security income.
Unfortunately, only about half (47 percent) of the investors polled by Nationwide said they get professional advice on when and how to claim Social Security benefits. There’s no reason to go it alone when determining the best plan for your family. Developing a relationship with a financial professional is a great first step that can make a huge difference not only for your own confidence, but also for the retirement security of those you care about.