Sometimes real life provides the best case studies. Mary Lou Daly, a financial adviser in Charlotte, N.C., posed an interesting scenario the other day.
Her client, Jane, is 63 years old. Jane was married to Rob for more than 10 years. They are divorced, and Rob is still alive and older than 62.
Following her divorce, Jane married David. They were married for five years when David died.
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Is Jane entitled to all three types of Social Security benefits: survivor benefits based on her second husband's earning record, spousal benefits on her ex-husband's earnings record, and a retirement benefit based on her own earnings. And if she could collect all three types of benefits, what would be the optimum way to claim them?
Normally, if you are eligible for both your own retirement benefit and a spousal benefit and you claim Social Security before your full retirement age, you are “deemed” to have filed for both your retirement and spousal benefit at the same time. You can't separate the two benefits.
That means you would be paid your own retirement benefit first, reduced for early claiming. And if your spousal benefit were larger, your retirement benefit would be topped off by additional amount to bring the combined total up to the spousal benefit amount, also reduced for early claiming. If your spousal benefit were smaller, you would not receive any additional amount beyond your own retirement benefit.
But if you wait until your full retirement age, the “deeming” rules no longer apply. That means you can restrict your claim to spousal benefits and collect half of your spouse's (or in some cases, your ex-spouse's) full retirement age benefit and allow your own retirement benefit to continue to grow.
At 70, you could switch to your own retirement benefit which would include four years' worth of delayed retirement credits.
In addition, survivor benefits and retirement benefits represent two different pots of money. You can collect one type of benefit first and switch to the other type later if it would result in a higher benefit.
But could Jane collect all three types of benefits?
I hadn't encountered this scenario before so I checked with the Social Security Administration to verify my hunch. The answer: yes, she can collect all three types of benefits, but she must do so in the following order.
First, Jane can claim reduced survivor benefits now on her late husband David's earnings record. Survivor benefits are worth 100% of what the deceased worker claimed or was entitled to claim at time of death if the surviving spouse collects benefits at her full retirement age or later; less if collected as early as age 60.
“Jane can file for survivor benefits now on David's record without having to file on her own record since 'deemed' filing does not apply,” Social Security press spokesman Ben Stump wrote in an email. In other words, because survivor benefits and retirement benefits represent two separate pots of money, she can claim survivor benefits now without any impact on claiming retirement benefits later.
Because Jane would claim survivor benefits three years before her full retirement age, her benefits would be worth about 87% of his full retirement age benefit.
And since she still works and earns about $30,000 per year, she would be subject to earnings cap restrictions that apply to anyone who collects any type of Social Security benefit before full retirement age. As a result, she would forfeit about $7,100 in survivor benefits next year to the earnings cap. SSA would withhold $1 in benefits for every $2 she earns over $15,720 in 2015. ($30,000 - $15,720 = $14,280/2 = $7,140).
Next, when Jane reaches her full retirement age of 66, she can file a restricted claim for spousal benefits based on her ex-husband's earnings record. Because they were married for more than 10 years, Jane, who is now single again, can claim spousal benefits just as if she were still married. In this case, she would receive 50% of Rob's primary insurance amount, which would be about $1,900 per month.
At 70, she could switch to her own retirement benefit, including four years' worth of delayed retirement credits that increase retirement benefits by 8% per year for every year she postpones claiming beyond full retirement age up to age 70. That would boost her Social Security benefit to about $3,350 per month — a 32% increase from her full retirement age benefit amount.
It may not be as simple as 1-2-3, but three separate Social Security benefits claimed in the correct order adds up to significant guaranteed income in retirement.
(Questions about Social Security? Find the answers in my ebook.)
