Elizabeth (name changed) contacted her financial advisor after her husband passed away earlier this year. One of the important issues discussed was the proper strategy to use in order to maximize her Social Security benefits. Elizabeth is 64 years old and earning $150,000 per year, with plans to retire at age 66. Her late spouse had previously retired and was already collecting Social Security.
To understand the situation, we first need to step back from this case and review changes that were made to Social Security regulations back in 2014 regarding the so-called “restricted Social Security application.” Prior to this time, a spouse at Full Retirement Age (FRA) – which is age 66 for people born through 1954 – could file an application for benefits, but specify that he/she would receive only spousal benefits at that time; that is, collect a benefit based on their spouse’s work record. Then, for four years until age 70, one could collect the spousal benefit while the potential monthly benefit based on their own work record increased by 32% (8% per year). Then, at age 70, the individual could switch from the spousal benefit to their own benefit at the increased amount. This proved to be a great strategy for couples where both spouses had substantial work histories.
However, under the new regulations, the restricted application has been phased out for any person born after January 1, 1954. Those born before that date who have not yet filed for benefits can still explore the possibility of using this strategy. The restricted application also remains available for widows, which applies perfectly to Elizabeth’s case.
The rules for widows’ benefits are rather complex. Factors that affect the calculation include:
- Whether the deceased spouse had already filed for benefits.
- If the deceased spouse had already applied, whether it was before or after their FRA.
- If the surviving spouse applies for benefits before their own FRA.
In addition, the FRA for a widow is slightly different, and widows may apply for benefits as early as age 60, although they will receive a reduced amount.
Given the above, it will be important for Elizabeth to get all the necessary information regarding both her and her spouse’s Social Security records from the Social Security Administration (SSA) in order for her advisor to develop the best strategy for her to use (as SSA employees are not trained to do this).
Based on available information, Elizabeth’s advisor recommended that she immediately file a restricted application for widow’s benefits. This would be done even though, because of the “earnings test,” she would not receive the benefits now. According to the earnings test, a worker prior to FRA, like Elizabeth, earning over a specific amount per month, will have her benefits withheld. They are not ultimately lost because upon reaching age 66, Social Security will recalculate her monthly amount, giving her credit for any payments that were withheld during the time when she earned more than the annual earnings limit. She won’t get a lump sum restoring the lost payments, but her monthly payment will rise with the aim of making her whole over time. By filing early, Elizabeth will be set up to receive benefits at the earlier of retirement or FRA. In her case, Elizabeth will receive a widow’s benefit from age 66 to age 70, and then file for her own retirement benefits, which will have been enhanced by the 32% delayed retirement credit.
When comparing this strategy to the situation in which Elizabeth would simply file for her own benefits at age 66, the suggested strategy will result in an increase in expected lifetime benefits of $242,000, assuming a life expectancy of 90. The benefits are lower under the suggested strategy for the first four years and then higher every year thereafter.
As mentioned earlier, couples in which at least one individual was born prior to January 2, 1954 are still entitled to use the restricted application strategy, and may get the same boost to their lifetime Social Security benefits that Elizabeth will receive as a widow. In the couple’s case, one person may collect benefits on his/her own record while the second person collects the 50% spousal benefit. Then, at age 70, the second person switches to his/her own benefit (with the 32% credit added) and receives the increased amount for the balance of his/her lifetime.
Further, whichever spouse is the first to die, the highest amount will continue to be paid to the surviving spouse.
Developing the proper strategy for collecting Social Security benefits is important for those approaching retirement age, whether couples of single, divorced or widowed individuals. Your advisor can help you decide on the best strategy by examining the options in the context of your overall financial picture.