For many couples retirement is not the happily ever after we like to imagine.
According to the 2009 Social Security Period Life Table approximately 19 percent of the population will pass before age 67, and this figure is 10 percentage points over the rate at age 57. Although passing before a normal retirement age may only impact a minority of the population, retirement income plans for those who experience the premature passing of a loved spouse may seem as if they are thrown askew. In those cases it can be difficult to know if or when benefits will be available or how Social Security and retirement income might change.
A 2004 article titled "The Economic Consequences of a Husband's Death: Evidence from the HRS and AHEAD" published in the Social Security Bulletin found that death in the years just before retirement can have a devastating impact on the financial outlook for the survivor. The loss of expected financial benefits during those years can significantly impact a non-working or lower-earning spouse as this is typically the time that the higher-earning spouse is is at the peak of her earning and saving potential, combined with the fact that many lower-earning spouses will be less likely to develop new skill sets or begin a new career during their final working years.
One aspect of Social Security that many approaching their 60s as a widow(er) may not be aware of are the survivor benefits for spouses and divorced spouses of descendents. This is a benefit on the Social Security record of a prior spouse who qualified for benefits. Eligible widow(er)s are those who were married for at least nine months before the death (this is waived if death is due to an accident or military duty), or surviving divorced spouses who were married for at least 10 years and did not remarry until after age 60. If you are in your 50s and disabled you may also qualify for a benefit, or if you are disabled and divorced after being married for at least 10 years. Such benefits are also available at any age if you are caring for a child of the descendent who is under 16 years of age or disabled.
Qualifications for being fully insured for this benefit are less stringent than normal retirement benefits. That means spouses may not have been aware their partner would qualify for Social Security may later find that they are eligible for a widow(er) benefit. In addition, benefits can be claimed as early as age 60, which is two years before the minimum age to otherwise apply for retirement benefits.
There are many planning implications for the surviving spouse benefit. One of the most important developments is that someone who would not qualify for Social Security retirement benefits on his or her own record can start drawing income early.
It is worth noting that Social Security benefits may become subject to income taxation. Taking a comprehensive look at your retirement cash flow and tax planning with the help of your financial advisor before taking benefits. If you plan to continue working, the benefits of claiming before your full retirement age should be weighed as well. At your full retirement age, the earnings test no longer applies.
If you are able to qualify for retirement benefits yourself, one strategy to generate some retirement while deferring (and growing) a claim on your own benefit would be to apply for a widow(er)s benefit. Once you are eligible to claim on your own benefit (usually at age 62), you can elect to switch to your own benefit. You could also choose to continue to allow it to grow by not claiming your own benefits before your full retirement age and earning delayed retirement credits up until age 70. The deferral of Social Security retirement benefits until age 70 is widely accepted to be in your financial interest if you have the ability to wait that long.
When filing, it is important to if you qualify for multiple benefits, and how to you should manage the benefits you wish to claim, and not those that you do not.
Planning for Social Security and retirement when widowed can be a very complicated undertaking, and there are many considerations to taking benefits. In addition to speaking with your local Social Security office, make sure to discuss your changing income and cash flow needs with a financial advisor or your accountant.
Robert Schmansky is an independent financial advisor and founder of Clear Financial Advisors in Livonia, Michigan. Rob has over a decade of experience in retirement planning and investment strategies.
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