Financial Planning Blog

In Part 1, the complex set of rules surrounding Social Security survivor benefits was explored. Survivor benefits can be crucial in providing an economic safety net for families that lose a provider’s income. In this post, we will look at some tips for making the most of the survivor benefits potentially available to you. But first, it is important to clarify exactly what a person must do for their family to be eligible to receive Social Security survivor benefits.

Worker eligibility

• A worker generally becomes eligible for Social Security retirement benefits after earning 40 work credits–or 10 full years. Work credits are earned by working in “covered” employment (including self-employment) where Social Security taxes are paid.
• However, the amount of credits a worker must have accumulated for his dependents to receive survivor benefits depends on the age of the worker at death. The younger a worker is, the fewer credits are necessary for the family to be eligible for survivor benefits. For example, a worker under age 28 would only need 6 work credits, at age 34 it is 12 credits, and at 46 it is 24 credits. If the worker dies at age 62, 40 work credits are required–the same as for retirement benefits.
• Finally, there is a special rule allowing a deceased worker’s children and spouse caring for children to receive benefits even if the worker didn’t have the number of required credits. In this situation with dependent children, benefits are available as long as the worker simply had accumulated 6 credits (1.5 years of work) in the three years prior to death.

Planning tips

• While still alive, have the highest earner maximize their benefit. Although the majority of people choose to start their retirement benefits early, with married couples it is often wise to maximize the higher of the two benefits. This entails having the spouse with the highest earned benefit wait until 70, gaining delayed retirement credits. This maximized benefit will then be available across both spouses’ lifetimes. This is the most cost effective way to secure a healthy inflation adjusted lifetime income stream that will protect a couple from longevity risk. This strategy is most compelling when the higher earner is the older spouse, and has a shorter expected lifespan (often the male).
• Coordinate survivor and personal benefits wisely. If you are eligible for both a personal benefit off of your own work record and a survivor benefit off of a deceased spouse’s work record, you have an important opportunity maximize the long term value of the combined Social Security benefit stream. The general rule is to maximize the larger of the two benefits by waiting to start it at the most opportune time. Compare what your personal benefit will be if you wait until age 70 (maximized with delayed retirement credits) with the survivor benefit at your full retirement age (FRA—after which it will not grow). If your maximized personal benefit is the highest, delay taking it until age 70. In the meantime, start taking the survivor benefit as early as age 60 (usually as soon as you stop working), then switching to your own benefit at 70. If the survivor benefit at FRA will be the highest amount available to you, wait until FRA to start it. In the meantime, you can start your personal benefit at age 62. Using this strategy, you benefit from the largest possible retirement benefit for the longest possible time.
• Your survivor benefit may not be maximized at your FRA. If your deceased spouse started his or her benefit prior to their FRA (and many, many do), then are situations when it will not make sense to wait until FRA to start. (Remember the widow(er)’s limit provision mentioned in Part 1.) For example, if your spouse filed early enough, your benefit may never be larger than 82.5% of their PIA. Your survivor benefit may be maximized at this 82.5% a few years earlier than your FRA, and it may not make sense to wait any longer to start taking it. This is complex, so if your deceased spouse started taking retirement benefits early and you have yet to reach your FRA, contact the SSA and have them calculate when your survivor benefit will be maximized.
• Be mindful of the earnings test. In the years prior to hitting your FRA survivor benefits are subject to the earnings test. If you are still working, it may be counter-productive to start taking survivor benefits if you are going to lose $1 of benefits for every $2 you earn over the limit (in 2012 it is $14,640). Depending on the situation, it may, or may not, make sense to start receiving benefits if you are still working. It may be wise to delay starting and let your benefit get larger.
• Get married. Survivor benefits are available to married couples, not to those couples who have chosen not to tie-the-knot. Your decision not to encumber your relationship with the bonds of marriage may prove to be an expensive one, when you consider lost survivor and spousal benefits. Most unmarried couples (at least the ones I talk to) are oblivious to the availability and value of survivor and spousal Social Security benefits.
• Hold it…maybe you don’t want to get married until age 60. Make that remarried. Remarriage prior to age 60 will make you ineligible for survivor benefits off of a deceased spouse’s record. (If that remarriage ends, you will again be eligible for the survivor benefits.) If you are contemplating remarriage and you are getting close to age 60, it might just be worth waiting a few months…or years. It is possible that these survivor benefits may be more valuable than your personal benefit, or any spousal benefits available off of a new spouse’s record. The survivor benefits are also available earlier (age 60) than your personal or spousal benefits (age 62). Don’t underestimate the potential value of wisely coordinating a survivor benefit with your personal benefit.
• Keep track of your ex-spouse. If you were divorced after being married for at least 10 years, you may be eligible for a survivor benefit off of your ex-spouse’s work record, if he or she passes away. Your ex-spouse is dead, and money now starts appearing in your checking account! This may sound too good to be true, but hey, this is America. Again, remarriage prior to age 60 will make you ineligible (unless that marriage ends, also). Don’t count on the SSA to magically find you, though. You will need to contact them and prove your eligibility for a survivor benefit.
• Survivor benefits are listed on your Social Security statement. Although these are not mailed out annually like they used to be, you can always get an updated statement here. Your statement tells you what your spouse and children would be eligible for if you were to die this year.

This long two part series on Social Security survivor benefits can be summed up neatly with just three key observations. First, Social Security is complicated—more complicated than you ever imagined. Second, what you don’t know about Social Security can cost you a considerable amount of money in forgone benefits. Third, obtain skilled counsel before making your Social Security filing decisions. Seek out a fee-only financial planner who has developed expertise in this critical area before it is too late.

As discussed in earlier articles, the Social Security System is designed to enhance the economic security of families, not just individuals. Social Security's structure of spousal and survivor benefits does provide a meaningful level of family income protection, but also adds significant complexity to an already complicated system. Unfortunately, a lack of understanding of the Social Security system may result in a failure to access available benefits at a critical time. In this post we want to take a closer look at the rules pertaining to benefits available to family survivors of a deceased worker.

Rules concerning survivor benefits

• A surviving spouse is entitled to a survivor benefit based off the deceased worker's Social Security earnings record. These are often referred to as "widow's benefits", but they also are available to widowers.
  • The two must have been married for at least nine months prior to the death, unless the death is due to an accident.
  • Remarriage before age 60 disqualifies a widow for survivor benefits. However, if that marriage ends (e.g. a divorce, death of the second spouse) the surviving spouse is again eligible for benefits off the deceased spouse's record.
  • Remarriage after 60 does not cause a person to lose eligibility for survivor benefits. That person could continue to receive the survivor benefit, but may also choose to switch to their personal benefit and/or spousal benefits based off of their new spouse's earnings record.
  • There is no double-dipping–a person cannot take a survivor benefit and their personal and/or spousal benefit. For example, John dies at age 70 with a $2,500/month benefit, while his 70 year old wife Mary was receiving own benefit of $1,000/month. She would drop her personal benefit and start receiving her survivor benefit of $2,500. She would not get to receive both benefits totaling $3,500.
  • If a person is unlucky enough to be widowed multiple times, they are eligible for the highest of the available survivor benefits.
  • There are potentially survival benefits available for divorced spouses.
• The size of the survivor benefit is determined by 1) the amount of the deceased worker's retirement benefit, and 2) the age at which the surviving spouse starts the benefits. However, there are some important adjustments and limitations that can make calculating the survivor's benefit pretty complex.
  • The survivor benefit is calculated off the prmary insurance amount (PIA), which is the monthly benefit the deceased worker would have received at full retirement age (FRA). If the deceased worker's benefit had been increased with delayed retirement credits (DRCs), then this higher amount (or "deemed life PIA") is used. (This includes the situation where a worker dies past FRA without having started to receive benefits–the deemed life PIA is adjusted upward for DRCs that had been earned up to point-of-death.) What this means is that if a worker delays starting their retirement benefits and earns DRCs, the surviving spouse will ultimately be eligible for a higher survivor benefit.
  • When a worker dies after receiving reduced benefits (i.e. retirement benefits were reduced for starting prior to FRA), the deceased worker's PIA is still the base for calculating the survivor benefit. However, the deceased worker's actual reduced benefit will be a limiting factor on the ultimate benefit available to the surviving spouse. This is because of an obscure, but very important rule called the widow(er)'s limit provision. The survivor benefit will never be higher than the larger of the deceased worker's actual benefit or 82.5% of the deceased's PIA. (This is meant to prevent, or at least limit, situations where the survivor benefit is higher than the actual benefit the deceased worker was receiving.) What this means is a worker's decision to take early benefits will reduce the potential survivor benefits available to their spouse.
  • If the surviving spouse waits until their own FRA*, they will receive the full survivor benefit–i.e. 100% of the deceased spouse's PIA (adjusted upward for any DRCs). However, in the situation where the worker had taken early reduced benefits, the widow(er)'s limit provision basically reduces the full survivor benefit to the level of the deceased worker's actual benefit, but not below 82.5% of the PIA. (Got that?) Important to note is that unlike a person's personal benefit, there is no advantage to waiting longer–the survivor benefit will not continue to grow past one's FRA (i.e. there are no delayed retirement credits with survivor benefits).
  • A surviving spouse can generally start receiving benefits as early as age 60. If a surviving spouse chooses to start receiving survivor benefits prior to FRA, the benefit is reduced up to 28.5% (to 71.5% of the full survivor benefit), depending upon how early they choose to start. (See this chart for details on the exact monthly reductions by birth year.) Even if the deceased worker had started reduced benefits at the earliest age (62), and the surviving spouse starts survivor benefits at the earliest possible age (60), the survivor benefit is never lower than 71.5% of the worker's PIA.
• There are some special rules that allow surviving spouses to receive benefits prior to age 60.
  • If the surviving spouse is disabled, they can start receiving benefits as early as age 50. Any benefit prior to age 60 would generally be 71.5% of the PIA.
  • If the surviving spouse who is not yet age 60 is still caring for the children of the deceased spouse, he or she is eligible for 75% of the deceased's PIA until the child reaches the age of 16. (Or any age if the child becomes disabled prior to age 22.)
• Surviving spouses are not the only ones entitled to benefits off a deceased person's Social Security earnings record. The deceased's children and dependent parents may also receive benefits.
  • Children of the deceased worker who are under age 18 (age 19 if still in high school) are eligible for a benefit equal to 75% of the deceased worker's PIA . (The child must also be unmarried.)
  • A disabled child may receive the same 75% benefit at any age, as long as he or she became disabled prior to age 22 and remains disabled.
  • Believe it or not, some parents may receive benefits off of their children's earnings records. If the deceased worker was providing greater than 50% of the support for a parent over age 62, then that parent may receive a benefit of 82.5% of the worker's PIA. If both parents were supported by the deceased worker, each is entitled to a benefit of 75% of the worker's PIA. Of course, if the parents were entitled to larger benefits off of their personal records, they would continue to receive them instead. They would not be able to receive a survivor benefit and their personal or spousal benefits at the same time.
  • A special one- time lump sum death payment of $255 is also available to surviving spouses who were living in the same household with the deceased worker at the time of death. If there is no spouse eligible for this benefit, it may be paid to a child (or children) eligible to receive benefits off the deceased's record.

Some limiting factors

As you can see, a number of people might be eligible to receive survivor benefits off of a deceased person's Social Security earnings record. These survivor benefits, when added together, could far exceed the benefits the deceased person would have received if they remained alive. However, there are a couple of important rules that limit the amount of benefits available to survivors.

• There is a maximum family benefit–the maximum monthly amount that can be paid on a particular worker's earnings record. This applies not only to survivor benefits, but also when a beneficiary is alive and receiving benefits. (There is a different maximum family benefit payable to a family of a disabled worker.) This is an excessively complicated formula, but the gist of it is that the family maximums range from 150% to about 180% of the deceased workers PIA.
  • For example, consider a deceased worker with a PIA of $2,000/month, who leaves a surviving spouse below the age of 60, and three children under the age of 16.
  • Each would be eligible for a benefit equal to 75% of $2,000, or $1,500/month. Combined these four benefits would equal $6,000/month, or 300% of the deceased's PIA.
  • However, the family maximum benefit in this situation would be about 175% of the deceased worker's PIA, or $3,500/month. In such situations, each benefit is adjusted proportionately to bring the total within the limits.
• There is the earnings test–which can mean lower benefits if a beneficiary works and earns too much in a year. Just as regular retirement benefits are subject to the earnings test, so are survivor benefits. This means that if the recipient is below their FRA and they earn over the earnings limit, they would lose some (or all) of their survivor benefits. In 2012 the earnings limit is $14,640 for benefit recipients who are below FRA for the entire year. For every $2 earned above $14,640, there will be $1 of Social Security benefits deducted.
  • For example, consider a person receiving $1,000/month ($12,000/year) in survivor benefits. As long as the person earns below $14,640 then there is no impact on their full $1,000/month survivor benefits. If they earn $24,640 for the year, then $5,000 of benefits will be deducted. (This is half of the $10,000 above the limit). If the person earns $24,000 or more above the limit (i.e. $38,640 or more) then their survivor benefit would be entirely lost.
  • If the recipient of benefits is past their FRA, then there are no earnings limits. They can earn as much as they want and still receive 100% of the benefits to which they are entitled.
  • There are special rules for the year in which a beneficiary hits their FRA.
  • Only earnings from work (i.e. wages or self-employment income) count toward the earnings test. Investment earnings, pensions, and other government benefits are not counted toward the limit.
  • The earnings test is on an individual, not a household level. As a result, if a surviving spouse earns above the limit it does not impact the benefits of any children also receiving benefits. Also, a person earning above the limit does not impact the Social Security benefits of their spouse.

Planning for the economic security of our families should be a primary concern for all of us. As you can see, Social Security may provide some significant survivor benefits to your family after your death. Part 2 will clarify exactly what a worker needs to do for their family to be eligible for these benefits, plus provide some important tips for maximizing the value of survivor benefits.

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*As if this isn't complicated enough, your full retirement age as a survivor may be different than your FRA for regular retirement benefits. For example, a person born in 1956 will have a survivor FRA of age 66, but a regular FRA of 66 and 4 months. This is because the birth years for the gradual FRA shifts from age 65 to 66 started in 1943 for regular benefits and in 1945 for survivor benefits. Also, the gradual FRA shift from age 66 to age 67 starts two years later-birth years 1954 for retirement benefits and 1956 for survivor benefits. (Was anyone paying attention when these rules are made?)

The availability of spousal benefits has a big impact on the percentage of people’s pre-retirement income that is replaced by Social Security. In Part 1, we examined “average” income earning singles and couples, and compared combined retirement benefits and replacement rates. We saw how spousal benefits lifted a married couple’s combined benefit, but the impact could be very different depending on whether both spouses worked or not. Here we will look at higher earners and see somewhat similar outcomes. And, if you compare the earnings replacement rates of these higher earning singles and couples with the lower earning people in Part 1, you will note that as incomes rise, replacement rates go down. (In other words, the Social Security retirement system is progressive, in that lower income earners receive a higher return on their taxes paid in than upper earners.)

Below are six more singles and couples, these with “high” incomes of $100,000 to $125,000 per year. Again, two of the examples are single workers, while the other four examples are married couples. Two of the married couples have only one working spouse (couples #8 and #11), while the remaining two couples are comprised of dual earners paying into the Social Security system. (The examples assume all are retiring in 2012 at their full retirement age of 66, and they have not yet consulted with Table Rock Financial Planning on ways to make the most of their Social Security benefits.)

• Compare the single individual and the married couple, both making $100K/year (#7 and #8). Assuming their earnings have been the same over their working life, they have paid the same amount of taxes into the Social Security system. However, due to the availability of a spousal benefit, the married couple stands to receive a 50% higher combined benefit. The high earning single person will receive a benefit that replaces about 29% of his or her pre-retirement income, but the married couple will receive combined benefits amounting to a 44% replacement rate. Again, we see that the married wage earner potentially receives a significantly larger return on his or her contributions to the Social Security system. Fair or not, it is how the system is designed. And, if you understand the somewhat complex rules of the system, there are many perfectly legal and ethical opportunities for a married couple to further maximize the potential value of their combined Social Security benefits.
• Next, check out the situation with married couples #8 and #9. Only spouse A worked in couple #8, earning a healthy $100K/year. Couple #9 has an even higher combined income since each spouse worked, earning $100K and $25K respectively. As a result of these work histories, couple #8 has only one spouse with their own earned retirement benefit, but with couple #9 both spouses have earned benefits. Remarkably, even though couple #8 earned less money and paid less into the system, they will have the same combined Social Security benefit as the higher earning couple who both worked and paid more taxes. (Not to be critical, but who designed this system? Could it have been Congress?) Both couples’ dollar benefits are equal, but the lower earning couple #8 is receiving benefits that replace 44% of their pre-retirement income, but the higher earning couple #9 is receiving only 35%. What this means is that, all things being equal, couple #9 will need to save more money to maintain a comparable post-retirement lifestyle. Couple #9 appears to get a raw deal here…but, isn’t it always that way with entitlements? The other guy always seems to get a better deal from The System. Get used to it. Couple #9 can console themselves and improve their situation by going to a fee-only financial planner that understands the Social Security system.They have some opportunities to increase their income by coordinating their spousal benefits.
• Like couple #9, couples #10 and #11 also earned $125K, but taking different paths to that end. With couple #10, both spouses worked and contributed to the combined income equally. (I’m sure they hyphenated their names and shared the chores equally, also.) In couple #11, the income was earned the old fashioned way–entirely by spouse A. After seeing the previous examples, including the average earners in Part 1, you probably assume these three couples will have wildly different combined Social Security benefits. Not so–they are all pretty close, with replacement rates between 35% and 38% of their pre-retirement incomes. In Part 1, we saw how having the earnings concentrated with one spouse can lead to higher earning replacement rates. However, high earning couple #11 didn’t find that to be true. The reason is that high earning spouse A earned over the Social Security maximum taxable earnings over their career, limiting both their Social Security tax liability and their eventual benefit.
• Finally, let’s compare the two single individuals (#7 and #12). Even though #12 earned on average 25% more than #7, their retirement benefits are very close to the same. This is fair, since they both probably paid about the same amount of taxes into the system. The higher paid #12 likely earned over the Social Security maximum taxable earnings for entirety of their career, where #7 probably earned close to, but slightly below the limit. However, when you compare their replacement rates, the lower earning #7 fares somewhat better than the higher earning #12–29% versus 24%. The key point here is that both of these high earning single people receive a much lower replacement income from Social Security than their married counterparts (#8-#11), whose combined benefits replace 35% to 45% of the couples’ similar incomes. Also, the Social Security retirement benefits these high earning singles receive provide them with a much lower replacement income than the lower (or average) earning singles we saw in Part 1. Higher earners need to save more to replace their pre-retirement incomes than lower earners. And, if you are single, count on having to save even more to replace your income in retirement than your married friends. Otherwise, don’t fret about not having a companion to dine out or vacation with–you won’t be able to afford it anyway.

If you haven’t figured it out yet, the Social Security system is much more complicated than you first thought…if you ever bothered to give it a thought. And, this only scratches the surface. To sum up, here are a few key takeaways:

• If you are single person–save more for retirement.
• If you are a higher earner–save more for retirement.
• Everyone else–save more for retirement. (Just to be sure.)

Social Security benefits are a sizeable chunk of most American’s retirement incomes. Before you make the important decisions regarding when to start your benefits, or how to coordinate your benefits with your spouse, make sure you have an adequate understanding of your options. This is a great time to consult with a fee-only financial planner who understands the system, in order to make sure you are doing the most to maximize your personal long term financial security.

In the previous post, the key rules regarding Social Security spousal benefits were introduced. Although most people are aware that a married worker’s spouse can receive a retirement benefit off the worker’s record, few appreciate exactly how much this influences the replacement income Social Security provides a family. Some examples will illustrate key points about how marriage, the distribution of income between spouses, and the availability of spousal benefits impact the amount of benefits received from the Social Security system.

Below are six different situations with workers making an “average” income of $40,000 to $50,000 per year. In two of the examples the workers are unmarried, with the other four comprised of married couples. In two of the married couples, one spouse does not work. In the other two married couples, both spouses have earnings covered by Social Security. (It is assumed all are retiring in 2012 at their full retirement age of 66. None of the individuals have been reading financial planning blogs suggesting they wait until 70.)

• Compare the single individual and the married couple, both making $40K/year (#1 and #2). Even though earnings and taxes paid into the Social Security system are the same, the married couple stands to receive a considerable amount more from the system. Due to the availability of the spousal benefit (equal to 50% of the worker’s primary insurance amount), the married couple will receive benefits replacing 66% of their pre-retirement income, compared to the single person replacing only 44%. Is this fair? I suppose it depends on whether you are the single person, or part of the married couple.This is a prime example of how Social Security is family oriented.
• Now compare married couple #2 with average earnings of $40K and married couple #3 with average earnings of $50K per year. Notice that spouse B of couple #3 contributed $10K/year of their earnings, and earned their own personal benefit of $700/month. However, spouse B’s earned retirement benefit is lower than the $738/month spousal benefit they are eligible for. The Social Security Administration (SSA) will supplement spouse B’s earned benefit to bring it up to the $738 spousal benefit. Note that the combined benefits of couples #2 and #3 are equal, even though couple #3 made 25% more money, and presumably paid 25% more into the system. The earnings replacement rate of the lower earning couple #2 is 66%, but drops to only 53% for couple #3. Unfortunately, that part time job for couple #3 didn’t contribute as much to their retirement as they had anticipated. Hopefully, they saved a good part of spouse B’s earnings.
• Similar to couple #3, couples #4 and #5 also earned $50K, but did so in different ways. In couple #5, only spouse A worked and earned a benefit. In couple #4, both spouses contributed equally to the family finances, both earning $25K/year. Both earn an equal benefit from Social Security, which is higher than the spousal benefit they would be eligible for off the other spouse’s record. Note that couple #4, where both spouses worked, has an earnings replacement rate of 52%–slightly lower than couple #3. Couple #5, where only one spouse worked, has a remarkably higher combined earnings replacement rate of 62%–about $400/month more than couples #3 and #4 where both spouses worked. How earnings are split between spouses makes a surprising difference. For these average earning couples, having the earnings concentrated with one spouse leads to higher earnings replacement rates. However, having earnings concentrated with one spouse does not necessarily lead to higher benefits as incomes rise, as you’ll see in Part 2.
• Finally, compare the two single individuals (#1 and #6). As expected, the one making $50K/year has earned a higher retirement benefit than the one making $40K/year. However, notice that the earnings replacement rate is a bit lower for the higher earning worker as compared to the lower earning worker (42% versus 44%). Even though Social Security retirement benefits increase with higher average lifetime earnings, the amount of pre-retirement income that is replaced by Social Security significantly declines. As you’ll see in Part 2, the replacement rate for a single worker averaging $125K/year drops to under 25%. This is just one way that Social Security benefits are already “means tested”–where higher earning people pay more and/or receive less from the system. Most will agree this is somewhat appropriate, but it is important to consider how much “means testing” is currently in the system before calling for more.

These examples give you an idea of how different factors determine the amount of replacement income people can expect from Social Security. Obviously, it makes a big difference for an individual or couple whether their Social Security benefits will replace 20% or 60% of their pre-retirement income. After all, they need a plan to cover the rest or else face a severe drop in lifestyle in retirement. Next, we will look at a similar set of examples covering higher earning workers and spouses.