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  • Writer's pictureChris Stein, CFP®

Rethinking Survivor Benefits

Surviving spouses, and ex-spouses that were married at least 10 years, are eligible to receive 100% of the amount their deceased spouse was collecting, or was eligible to collect, as long as the surviving spouse has reached their full retirement age.  As we have blogged before, the full retirement age for survivor benefits can be slightly different than your FRA for retirement benefits so refer to our table in the resources section to check your FRA for survivor benefits.  As with most SS benefits, if you claim before your FRA you will receive a reduced amount.  In the case of survivor benefits, you can claim as early as age 60 (age 50 if disabled), but you will receive only 71.5% of your deceased spouse’s benefit rather than the entire amount.

Rethinking Your Decision

We have looked at the trade-off of claiming earlier vs. later in several previous posts.  But what if you have already claimed a survivor benefit at age 60, but are now rethinking that decision?  Let’s look at some simple numbers to determine how wise that choice may have been, and what can be done to make it better.

Claiming At Age 60

Let’s assume we have a widow who is age 65.  Her husband passed away at her age 59 and was entitled to a SS retirement benefit of $2,000 per month.  Her FRA is 66 and had she waited to claim her survivor benefit until then would have received the full $2,000 per month.  She instead claimed a reduced benefit of $1430 per month at her age 60.  She is now wondering if she made the right choice.  I would propose she made the wrong choice to the tune of over $40,000.  Let me explain…

Claiming At Age 66

Had she waited to age 66 she would have received an extra $570 per month for the rest of her life with an inflation adjustment.  To get this extra amount she would give up receiving $1430 times 72 months for a total of $102,960.  We can look at this as her “buying” an inflation adjusted lifetime annuity of $570 per month beginning at age 66 for a one time lump sum amount of $102,960.  Let’s compare that to what an annuity of that amount would cost from a private insurance company rather than “buying” it from Social Security.  Well, at current market rates in 2017 that private annuity would cost her about $142,500 (give or take a couple grand depending on the company).  This means Social Security is offering to “sell” her the annuity at a MUCH lower price (142,500 – 102,960 = $39,540 LOWER).  But what can she do now after having claimed early some 5 years before (remember she is 65 now and claimed at 60).

Withdrawing Survivor Benefits Application

Unlike retirement benefits applications which cannot be withdrawn after 12 months have passed, survivor benefits have no such time limit.  As long as she is willing to pay back all the money they have given her since age 60 ($1430 per month), they will allow her to re-file at age 66 as if she never claimed early, thus entitling her to the entire $2000 per month.  Now, of course she has to have the money to do so, but if she is contemplating buying an annuity to generate more income, her MUCH better deal is to “buy” it from the Social Security system rather than a private insurance company.  This situation occurs mostly during times of low interest rates.  In a higher interest rate era, the private insurance MIGHT be more competitive with the Social Security payout.

To listen to our audio post on this topic, please use the play button below.

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