Social Security benefits are often the largest source of income for seniors aged 65 and older, according to the Social Security Administration. Nevertheless, many Americans misunderstand important aspects of the retirement program, and knowledge gaps can lead to financial mistakes.
For instance, Nationwide Retirement Institute says 44% of surveyed adults were unaware that, upon the death of a spouse, the bigger Social Security benefit can be inherited by the surviving partner. But survivors' benefits are usually paid from when the claim is filed, not retroactively to spouse's death, meaning the surviving partner could permanently lose income if failing to apply promptly.
Read on to learn more.
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Understanding the difference between Social Security benefits for retired workers, spouses, and survivors
Social Security's Old-Age and Survivors Insurance Trust Fund pays benefits to three types of individuals: retired workers, spouses, and survivors. Here are the differences:
Retired-worker benefits
Retired-worker benefits are based on lifetime earnings and claiming age. A formula is applied to the inflation-adjusted income from the 35 highest-paid years of work to calculate the primary insurance amount (PIA). The PIA is the payout a worker will receive if claimong Social Security at full retirement age (FRA).
Workers who claim before FRA get a reduced benefit, meaning less than 100% of their PIA. And workers who claim after FRA get an increased benefit, meaning more than 100% of their PIA. The precise amount by which benefits are reduced or increased depends on how many months early or late the individual claims Social Security.
There are two qualifications to those rules. First, eligibility for retirement benefits starts at age 62, so no one can claim earlier. Second, delayed retirement credits stop accruing at age 70, so it never makes sense to claim later.
Spousal benefits
Spousal benefits allow spouses to claim Social Security on the work record of a retired partner under certain conditions. First, the spouse must be at least 62 years old. Second, the partner on whose record the spouse claims must be receiving Social Security benefits.
Spouses who claim benefits at FRA will receive an amount equal to 50% of their retired partner's PIA. Spouses who claim benefits before FRA receive a reduced amount, meaning less than 50% of their retired partner's PIA. The exact reduction depends on how many months early benefits start, but it can be as much as 35%. There is no advantage to starting later than FRA because spousal benefits do not earn delayed retirement credits.
Survivors' benefits
Survivors' benefits are paid to widow(er)s following the death of their spouse under certain conditions. The survivor must be at least 60 years old in most cases, must have been married at least nine months before the spouse's death, and must not have remarried before age 60. The survivors' benefit will equal the retirement benefit paid to the deceased person if claimed at FRA.
Widow(er)s who claim survivors' benefits before FRA receive a reduced payout. The precise reduction depends on how many months early payments begin, but it can be as much as 29%.
What happens to your Social Security benefit when your spouse dies
Married couples usually receive two Social Security checks. That could mean two retired-worker benefits, or one retired-worker benefit and one spousal benefit. Either way, when one spouse passes away, the surviving partner loses one income stream.
Survivors' benefits let the surviving spouse keep the larger benefit to compensate for that lost income. If you already receive the larger payout, nothing will change when your spouse dies. But if you receive the smaller payout, you can replace your Social Security benefit with that of your deceased spouse by applying for survivors' benefits.
Here's an example: Mark receives a retired-worker benefit of $1,500 per month, and his wife, Mary, receives $1,250 per month. If Mary passes away, Mark need not apply for survivors' benefits because he already gets the larger check. But if Mark dies, Mary will receive $1,500 per month (in lieu of $1,250) if she switches to survivors' benefits.
Importantly, whereas spousal benefits equal up to 50% of a retired worker's PIA, survivors' benefits equal up to 100% of a retired worker's benefit. That means delayed retirement credits are passed along to the widow(er). So the age at which retirees start Social Security affects not only their benefit but also the survivors' benefit their spouse might receive.
Accordingly, in situations where one spouse is significantly older and has a larger PIA -- meaning that spouse's life expectancy is shorter and the baseline benefit larger -- it may be sensible for that person to delay Social Security until age 70 to ensure that his or her partner receives the largest survivors' benefit possible.
