I received an email from a financial adviser in Salt Lake City recently who faced a tough situation. For obvious reasons, he would like to remain anonymous.
"I thought I knew a lot about Social Security, but I learned a new and costly (around $29,100) lesson two weeks ago," the adviser wrote to me in an email.
"My mother-in-law is a widow and is turning 66 in June," he wrote. "She went into the Social Security Administration (SSA) office about a month ago to make all of the necessary preparations to start receiving her full survivor benefit when she turned 66," he explained.
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"During the appointment, the SSA counselor asked whether she realized that she could have filed for and received her own reduced retirement benefit when she was 62 and then receive her full survivor benefit without any reduction at age 66," he wrote. "This of course made my mother-in-law sick to her stomach, and it makes me sick as well, given that she has missed out on four years of retirement benefit payments."
The adviser asked whether it was widely known that a widow has the option of collecting a reduced retirement benefit first, without any reduction in a survivor benefits later, as long as she is at least full retirement age when she claims the survivor benefit. "This was new to me," he wrote.
"Yes, that is standard claiming advice for a widow with little or no earned income," I responded, adding that he could find the details in my ebook.
I also noted that my advice would be different if his mother-in-law was still working at 62 and earning significantly more than the annual earnings cap restrictions. In 2015, individuals who are younger than full retirement age for the entire year and who collect Social Security while continuing to work forfeit $1 in benefits for every $2 earned over $15,720.
In the case of a higher-earning widow, she might be better off collecting her full survivor benefit at 66 when the earnings cap disappears and switching to her own higher retirement benefit at age 70. The key to this strategy is that survivor benefits are frozen in time. They don't earn delayed retirement credits if benefits are postponed beyond full retirement age. But retirement benefits accrue delayed retirement credits worth 8% per year for every year one postpones collecting them beyond full retirement age up to age 70.
A survivor benefit is worth 100% of what the deceased worker was collecting or was entitled to collect at the time of death — including any delayed retirement credits that the deceased worker earned.
The adviser also asked if there was anything his mother could do to recoup the lost benefits.
Unfortunately, no. SSA does not pay retroactive benefits before full retirement. If someone delayed collecting a benefit beyond full retirement age, they could request a lump sum retroactive payment of up to six months of benefits beginning no sooner than full retirement age.
Separately, I heard from Michael Berardi, an agent with New York Life office in Bala Cynwyd, Pa., near Philadelphia. He also had a question about missed opportunities.
"I have a client who plans to file for his Social Security benefits when he turns 70 in May," Mr. Berardi wrote to me in an email. "His spouse filed and started receiving her benefits seven years ago at age 62," he added. "Is there anything she can do differently now that he is filing or is she stuck with her original election?"
It depends on the amount of the wife's benefits relative to her husband's. If her spousal benefit — based on half of his full retirement age benefit, not half of his larger age 70 benefit — is larger than her own retirement benefit, she would step up to a larger benefit once her husband claims his.
But the real missed opportunity involves the husband. He could have filed a restricted claim for spousal benefits to collect on his wife's Social Security record for the past four years. And even though she collected her reduced benefits early, his spousal benefit would have been based on her full retirement age amount.
(Questions about Social Security? Find the answers in my ebook.)