A WIDOW lost out on an extra $213,000 in Social Security payments following the death of her husband.
Having a thorough understanding of survivor benefits is key, as following a simple rule could mean the difference between pocketing or missing out on six figures.
The emotional devastation when a spouse passes away can be amplified by the financial toll that hits widows and widowers hard, significantly impacting a household’s Social Security benefits.
A death can axe a household income by 30% to 50%, a decrease that is often coupled with a tax increase – a double hit that is known as the widow’s penalty.
Diane, a 75-year-old widow who had been collecting her own Social Security benefit for over 10 year, experienced this firsthand, per Kiplinger.
The woman assumed, like many widows, that her monthly benefit of just over $1,000 was what she was supposed to receive.
Following a Social Security workshop, however, Diane realized that she was actually entitled to a much bigger survivor benefit of $2,400 based on her late husband’s earnings.
She could have received approximately $16,800 more per year in Social Security, which comes out to $213,000 over her expected lifetime.
Diane had also missed out on over $84,000 in income from ages 70 to 75.
American seniors are losing out on over $3.4 trillion by failing to claim their Social Security benefits at the ideal time, per a study from United Income.
Only 4% of beneficiaries file at the optimal time, per the study, meaning that 96% are missing out, with widows especially vulnerable.
There are three steps that Americans can take to financially prepare for widowhood, which is a certainty for most couples.
1. PLAN AHEAD
The first financially responsible step that couples can take is to plan ahead for Social Security survivor benefits.
Although a household’s income takes a major hit when a spouse dies, the tax bracket often does not decrease.
Because the surviving spouse begins to file as a single taxpayer rather than jointly, they may enter a higher tax bracket see their standard tax deduction drop by 50%.
As a result, a widow may abruptly have less income but owe more taxes on less income, a cut especially harmful if the income was dependent on the higher Social Security paychecks.
HOW TO SUPPLEMENT YOUR SOCIAL SECURITY
Here’s how to supplement your Social Security:
Given the uncertainty surrounding Social Security’s long-term future, it’s essential for workers to consider ways to supplement their retirement income.
Senior Citizens League executive director, Shannon Benton recommends starting early with savings and investing in retirement accounts like 401(k)s or IRAs.
- 401(k) Plans
- A 401(k) is a retirement account offered through employers, where contributions are tax-deferred.
- Many employers also match employee contributions, typically between 2% and 4% of salary, making it a valuable tool for building retirement savings.
- Maxing out your 401(k) contributions, especially if your employer offers a match, should be a priority.
- IRAs
- An Individual Retirement Account (IRA) offers another avenue for retirement savings.
- Unlike a 401(k), an IRA isn’t tied to your employer, giving you more flexibility in your investment choices.
- Contributions to traditional IRAs are tax-deductible, and the funds grow tax-free until they are withdrawn, at which point they are taxed as income.
For this reason, it is crucial for married couples to plan ahead and consider factors such as which spouse has the higher benefit and if it makes sense to delay claiming to maximize the survivor benefit.
2. AVOID COMMON MISTAKES
Older Americans can better financially brace for their futures by being aware of and avoiding some of the most common Social Security mistakes for surviving spouses.
Most errors when claiming Social Security step from three issues, with one of them being that the claiming process is highly complicated due to there being over 500 possible filing combinations for couples.
Americans also frequently make mistakes because Social Security agency reps are unable to offer personalized guidance or help recipients optimize their benefits.
A third reason that retirees make errors when claiming is that most financial advisers focus on areas outside of Social Security, a misstep that can impede a solid plan.
In order to avert these common mistakes, widows and widowers must have a grasp of the survivor benefit rules.
A surviving spouse, for example, can begin to claim survivors benefits as early as age 60, or 50 if disabled, but the amount will be reduced unless they wait until full retirement age, or FRA.
Widows or widowers between age 60 and the FRA are entitled to between 71.5% and 99%, while a surviving spouse at FRA can generally receive 100% of the deceased’s benefit.
They can also switch between their own Social Security benefit and the survivor benefit.
3. RUN THE NUMBERS
Retirees can further optimize their Social Security survivor benefits by playing around with the numbers and modeling different scenarios.
For example, understanding your retirement income sources, how they are taxed, and when they are available is crucial.
Widows and widowers should also consider their household status, as being married, divorced, widowed, or single can significantly impact one’s strategy.
Running the figures is also a helpful planning tool, as the difference between one strategy versus another could be six figures.
Understanding survivor benefit rules is critical, as it can mean the difference between financial security and missing out on six figures.
