Diane, a widow of 75, believed she was doing everything correctly. She had been getting a few dollars more than $1,000 per month in Social Security benefits for over a decade. Following her husband’s death, she figured nothing significant had to be altered. But at a Social Security seminar, she was amazed to discover that she had been leaving behind a significantly higher monthly survivor benefit—$2,400—on the earnings of her deceased husband.
That mistake cost her over $213,000 during her lifetime. Alone between the ages of 70 and 75, she forfeited over $84,000 in income. Diane’s case is not alone, unfortunately.
The Widow’s penalty: A double hit
When one of the spouses dies, the emotional toll is already enormous, but the financial hit can be enormous too. That’s what it is called, the widow’s penalty. When the other spouse dies, household income falls by 30% to 50%, but taxes may even increase. The other spouse’s status as a single filer means a higher tax rate and lower standard deduction.
For Diane, that translated into not only a reduced monthly stipend but also an increased annual tax bill. It’s a bad combination that pushes countless older Americans into crisis.
Why so many miss out
Only 4% of people claim their Social Security benefits as they are supposed to, according to research by United Income. That leaves 96% of retirees, especially widows, leaving money on the table. Why? The system is too complicated.
With more than 500 possible couples filing combinations, it can be overwhelming to know when and how to claim. Social Security administrators can’t give you personalized advice, and most financial advisers don’t allocate enough time to Social Security planning.
How to avoid the same blunder
If you’re retiring or are married, there are three things you can do now to avoid Diane’s dilemma:
1. Plan Ahead
Don’t think only of wealth. Think about whose wealth is greater and whether delaying one of your claims could result in a greater survivor benefit in the future. Remember, survivor benefits can begin as early as age 60 (age 50 if disabled), but they are less unless you delay until full retirement age.
2. Sidestep Common Mistakes
Don’t count on the Social Security Administration to direct you toward the optimum choice. Get help from a qualified expert who has knowledge of survivor benefits. Widows can swap between their own and survivor benefits—an adjustment that can make a big income difference.
3. Run the Numbers
Before you make up your mind, work out different possibilities. What happens if you wait until the age of full retirement? What happens if you switch benefits down the road? Setting aside the time to calculate multiple plans could be the key to financial stress versus ultimate security.
Read this later
Diane’s story is a heartbreaking reminder of how simple it is to miss out on what you’re entitled to. Survivor benefits are there — but you have to know how and when to claim them. Don’t wait. Understanding your options today could protect your tomorrow.
