Make the Most of a Survivor Benefit

EDITOR'S NOTE: This article was originally published in the November 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.

Your higher-earning spouse dies, and you're eligible for a Social Security survivor benefit. But should you instead claim a benefit based on your earnings? One study finds that some individuals, even lower-earning spouses, could do better if they claim a survivor benefit first and then switch to their own benefit at age 70.

Let's start with some Social Security basics. Those born between 1943 and 1954 can claim a full benefit at 66. You can collect your own benefit as early as 62, but it will be permanently reduced by a certain percentage for each month you claim early. If you collect at 62, for example, you'll get 75% of your full benefit. For each month you delay beyond 66, your benefit will increase by a small percentage -- up to 8% a year -- until 70.

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A widow or widower is entitled to a survivor benefit that is equal to 100% of the deceased spouse's benefit, as long as the survivor waits until full retirement age to collect. If a survivor claims a survivor benefit earlier, that benefit will be reduced somewhat. You can collect a survivor benefit as early as age 60.

If a spouse dies, the survivor has several options to maximize Social Security benefits. William Reichenstein, a professor of investment at Baylor University, in Waco, Tex., and his co-researchers ran through several calculations that show the various possibilities.

One option is to start collecting a survivor benefit at perhaps 60 or 62. When you reach 66 or later, you can switch to your full benefit based on your earnings. Switching only makes sense if your own benefit when you switch will be worth more than the survivor benefit. Collecting that survivor benefit early may enable you to afford to delay claiming your own benefit.

Take Jack and Beth, who are both 62. Jack's full benefit at 66 is $1,000, while Beth's is $800. Neither is collecting benefits. Jack dies at 62, and Beth decides to claim a benefit. But should Beth claim a benefit based on her own earnings at 62 and later switch to a survivor benefit? Or should she claim a survivor benefit now, and perhaps claim her own benefit later?

Let's say she takes her own benefit now. Because she is claiming at 62, her monthly benefit would be reduced to $600. At 66, she switches to a monthly survivor benefit of $1,000. By age 84, which is her life expectancy, she would have received $181,125 in present value, which is the current worth of the future income stream, according to Reichenstein.

But, says Reichenstein, Beth could boost the lifetime value of her benefits by switching the order. If she claims a survivor benefit at 62, Jack's $1,000 full benefit would be reduced, to $810, because she is claiming early. At 70, she switches to a monthly benefit of $1,056 based on her own record (her $800 benefit plus 32% in delayed credits). The present value: $189,379. "By waiting until 70 before she begins benefits based on her earnings record, her payments will rise above the survivor payments," Reichenstein says.

Let's say Jack doesn't die at 62. Jack and Beth both hold off on claiming benefits. He dies at his full retirement age of 66. She decides to claim benefits.

Beth claims her monthly survivor benefit of $1,000. If she continues collecting that until she dies at age 84, she'll get $173,629, Reichenstein figures. If she collects the $1,000 survivor benefit at 66 and then switches at age 70 to a benefit based on her own record, she'll get $1,056 a month -- for a total of $180,822.

What if Beth dies first, at age 66? In one scenario, Jack claims his own benefit of $1,000 until he dies at age 82, collecting $159,649. If instead he collects a survivor benefit, of $800 a month, he could switch to his own benefit at 70. By delaying four years past his full retirement age, his benefit based on his earnings would be worth $1,320 -- for a total of $187,244.

The lesson: Many individuals who are eligible for benefits based on their earnings and for survivor benefits could end up better off by claiming a survivor benefit first and then switching to their own benefit at 70. Reichenstein says you'll need to "run the calculations both ways" to make a decision.

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