Sometimes it makes sense to claim a smaller benefit now and a bigger benefit later. There are several situations where this would be the case. Here’s one example.
A widow is approaching her Full Retirement Age of 66. If she claims her regular Work History Benefit at age 66, she will receive a monthly benefit check of $1,600. She also has the option of claiming her deceased husband’s monthly benefit of $1,400 in the form of a Survivor Benefit.
Why would she claim a smaller Survivor Benefit of $1,400 when she could claim her own regular benefit of $1,600 per month?
It turns out there is a very good reason why she should do exactly that…
Sometimes the Obvious Choice Isn’t the Best Choice
Let’s assume married couple Pat and Cory are the same age and, at age 62, they are both considering retiring. Pat’s Social Security benefit at her Full Retirement Age of 66 is $1,600 per month, and Cory’s benefit at his Full Retirement Age is $1,400 per month.
Pat really likes her job and instead of retiring at age 62 and receiving a reduced monthly check, she decides to continue to work until age 66 and claim her Social Security benefits at that time. Because Pat has decided to work until age 66, Cory decides to continue to work also and claim his benefits at age 66.
In this case, Cory dies just before his 66th birthday and prior to either spouse claiming their Social Security benefits. Pat still wants to retire at age 66 and claim her benefits then. She has a choice of which Social Security benefit to claim: either her own Work History Benefit of $1,600 per month, or Cory’s Survivor Benefit check of $1,400 per month.
You may think the decision is obvious: She should take the $1,600 monthly check based on her work history. Believe it or not, that’s probably not the best choice. This is where the flexibility of the Survivor Benefit comes into play.
If Pat takes Cory’s check in the form of a Survivor Benefit of $1,400 per month, she can continue to delay the claiming of her own Social Security Work History Benefit. By doing so, the size of her own unclaimed Work History Benefit check will continue to earn Delayed Retirement Credits and grow by 8% per year for every year that she delays after her Full Retirement Age of 66.
She can continue to delay up until age 70, which would maximize the size of her own monthly Work History Benefit check, increasing it from $1,600 per month up to $2,112 per month. If she claims the monthly Survivor Benefit check of $1,400 per month, she has the option of switching over to her own Work History Benefit at any time up until the age of 70.
Table 1 above shows you what the numbers look like if Pat claims her own Work History Benefit at age 66. Pat does what appears to be the obvious choice and claims her own Work History Benefit of $1,600 per month, at age 66, and she receives that benefit for the rest of her life.
In Table 2 above, after Cory dies at age 66, Pat claims a Survivor Benefit of $1,400 per month. This $1,400 per month is the amount Cory would have received at his Full Retirement Age of 66. By claiming the Survivor Benefit at age 66, she delays claiming her own Work History Benefit, and as a result, earns Delayed Retirement Credits, allowing her benefit to grow by 8% per year.
She collects the $1,400 per month ($16,800 per year) for a period of four years when she is age 66, 67, 68, and 69. At age 70, she switches from her Survivor Benefit of $1,400 per month to her maxed-out Work History Benefit of $2,112 per month, which she receives for the rest of her life.
Because she could take advantage of Cory’s Survivor Benefit, Pat was able to delay her own Work History Benefit until age 70. By delaying her Work History Benefit until age 70, she maximized her benefit and locked in the largest check she could receive from Social Security for the rest of her life.
Female life expectancy for a 66 year old woman is about 20 years. If Pat lives to her life expectancy, she will save herself from an $88,000 mistake if she claims the smaller benefit first.
Consider that if she had claimed her own benefit at age 66, she would have received $384,000 from Social Security over the course of retirement.
$1,600 monthly benefit x 12 months x 20 years = $384,000
However, by claiming the smaller Survivor Benefit benefit first and then switching to her own maxed out benefit at 70, she will collect a total $472,704 from Social Security.
$1,400 benefit x 12 months x 4 years = $67,200
$2,112 benefit x 12 months x 16 years = $405,504
The difference between these two strategies is $88,704, an amount that is received from the strategy of claiming the smaller benefit first.
$472,704 – $384,000 = $88,704
I think you would agree that receiving a check from Social Security every month totaling $2,112 would make life a lot easier versus receiving a check totaling only $1,600. In fact, if they had both claimed benefits at age 62, like many married couples do, her monthly Social Security check would have been only $1,200.
In this case, the combination of delaying, along with the flexibility of the Survivor Benefit should make Pat’s life a lot easier after the death of her husband, at least from a financial perspective.
#10 Coming Soon!