Deciding when to take Social Security widows benefits can’t get more complicated

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Larry Kotlikoff’s Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we now feature “Ask Larry” every Monday. Find a complete list of his columns here. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Let us know your Social Security questions. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.

Roseanne — Texas: I am 62 years old and unmarried. My husband died many years ago. I was told I can collect survivor benefits now, but I cannot make more than $18,000 per year otherwise the benefits will be reduced. If I wait until I am 65 and collect my own Social Security benefits, can I also collect my deceased husband’s benefits, or half of his?

Larry Kotlikoff: Widow(er)s can actually start collecting reduced survivor benefits as early as age 60 (age 50 if they are disabled and become disabled before or pretty soon after their spouse died).

Your precise optimal strategy will depend on your earnings history, your late spouse’s, and also whether he took his retirement benefit early, in which case the RIB-LIM formula applies (read more about that in this column). To sort this out, you’ll need to use very careful software that takes into account the following Social Security provisions: the early widow’s benefit reduction — unless the RIB-LIM formula comes into play, the earnings test, the adjustment of the reduction factor and the delayed retirement credit.

But the basic point is that you want to take either A) your widows benefit first, while letting your own retirement benefit grow, which it will do through age 70, or B) your retirement benefit first, while letting your widow benefit grow, which it will do through full retirement age or earlier if the RIB-LIM formula applies. The earnings test will be applied to whatever benefit it is that you take prior to reaching full retirement age — if your earnings exceed the exempt amount. Currently, the exempt amount is $15,480 for those below full retirement age. Those who will reach full retirement age this year can earn up to $41,400 in the months prior to reaching full retirement age. On the day they reach full retirement age, the earnings test stops.

On the Social Security website, you’ll find this statement about the earnings test: “It is important to note that any benefits withheld while you continue to work are not ‘lost.’ Once you reach FRA, your monthly benefit will be increased permanently to account for the months in which benefits were withheld.”

​This statement, like so much that Social Security says on its website, is not the full truth. What is true is that whether you lose some or part of your widow’s benefit or your retirement benefit ​or both due to the earnings test prior to full retirement age, you’ll have that benefit or those benefits increased starting at full retirement age under the adjustment of the reduction factor (ARF). But what Social Security isn’t telling you is that once you flip from one benefit to the other, in following the optimal strategy, you’ll lose the ARF on the benefit from which you switch.


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For example, if you take your retirement benefit before full retirement age, have it zapped by the earnings test, and then switch to your widows benefit at full retirement age, your retirement benefit will be higher due to the ARF, but you’ll still receive just your widows benefit since Social Security will give you the larger of either your retirement benefit (reduced, but then adjusted for the reduction factor) or your widows benefit. The failure of the ARF to fully protect you against the earnings test could make a big difference as to whether you should take your retirement or widows benefit first. Indeed, this feature of the ARF will tend to make it better to take your widows benefit first.

But to make things even more opaque, Social Security will tell you your total check consists of your retirement benefit (reduced, but then adjusted for the reduction factor) plus your excess widow’s benefit. But your excess widow’s benefit is your widow’s benefit less your retirement benefit (reduced, but then adjusted for the reduction factor). If you add these two components to your check together, you’ll see you just get your widows benefit after full retirement age. Effectively, then, you do lose benefits due to the earnings test and never recoup them.

With all this said, let me address your specific question. If you wait until 65 to collect your own retirement benefit and then apply for your widows benefit at the same time, you’ll get the larger of the two or, in Social Security’s lingo, you’ll get your own retirement benefit plus your excess widows benefit. In other words, you won’t get both benefits. The excess widows benefit can be below or above half your deceased husband’s full retirement benefit depending on the specifics of your earnings histories.

Jeremy: My wife and I are in our early 40s. We both earn more than the annual contribution/tax limit and expect to receive similar payments in the higher range of whatever payments the government can afford when we retire.

If we are going to consider Social Security as an important part of our retirement savings, my concern is, if I understand the spousal benefit properly, when one of us dies this will cut our total Social Security income in about half (basically from two checks to one). While the survivor will have less food and medical costs to cover, I wouldn’t expect their expenses to go down that much.

We are worried about our ability to support ourselves in retirement. I was wondering if there are any annuities or other approaches you recommend people consider to cover this risk.

For example, I was wondering if we can buy an annuity that would start paying when the first person dies and goes until the second person dies. I know we could buy two longevity annuities, which pay if each person is alive at some age. But I don’t really need it if we are both alive.

I wonder if I am complicating this since it seems like a common problem many people would have in their planning and I don’t see anything written about it.

Larry Kotlikoff: You can buy joint survivor annuities that pay the same amount until the last spouse dies. This achieves what I think you want, namely more income per person when one spouse is alive. But, given how much money the Federal Reserve has printed in the last six years, and how much they will be forced to print through time to help pay our bankrupt government’s bills, I wouldn’t buy any annuity that’s not fully indexed against inflation. By fully indexed, I mean that if prices rise by X percent, your annuity payment is increased by X percent. Graded annuities, which start lower, but rise at a fixed rate (e.g., 3 percent) through time, aren’t the same as a fully inflation-indexed annuity. I understand that The Principal Life Insurance Company sells such annuities, and other insurers may as well.

Elizabeth — Massachusetts: I am 62. My husband died on his 58th birthday. I continue to work full time. I was advised by Social Security that I should wait until age 66 to take my widows benefit and to take my own retirement benefit at age 70 if I continue working. Is that correct?

Larry Kotlikoff: This may well be the right thing to do. I would confirm this using careful software.

Nancy — Mississippi: I married four years ago and have worked through 2013. My husband and I are officially self-employed, but we declare him now as head of household and our income goes in his name. I am 62 and my husband is 61. We hope to work for five more years. I am wondering if I take my benefits early if they will be better tied to my income? We are currently working in Africa and are not sure that the extra income would hurt us in taxes.

Larry Kotliloff: Small family businesses like yours that are jointly operated by spouses can ​easily reallocate company income to one or the other spouse. If you’ve had the shorter work history and your husband the longer one, putting more earnings in your name could, in theory, raise your family’s total lifetime benefits. But you can’t do this without breaking the law. So to be honest, you need to allocate earnings within your firm to the two of you based on your actual contributions to the company.

Donna — Massachusetts: My second husband was on Social Security Disability when he died in 2011 at the age of 58. We had been married for a little over two years. My first marriage ended in 1991 after 16 years. I am currently 61 (will be 62 in September) and working full-time. My company has layoffs every year, each year asking for volunteers. There is always a package that would give me approximately 25 weeks severance. If I were to accept a voluntary layoff, would I be able to collect from my second husband’s disability? I thought I read that if possible, it would be to my benefit to collect from my deceased (or former) husband’s Social Security until age 70, then to collect on my own Social Security as it would be higher.

Larry Kotlikoff: Yes, you have this straight. But you can also collect divorcée spousal benefits on your ex’s earnings record as a divorced spouse, then switch to your widows benefit on your second spouse, and then switch to your own retirement benefit at 70. What’s best will depend on your precise earnings history and that of your deceased and ex-husbands.