Planning Tips For Social Security Survivors

Tim Darmafall, CPA at UHY LLP talks about planning tips for social security survivors.

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Sterling Heights, MI (PRWEB) June 16, 2014

Generally, when one thinks of Social Security, they tend to look at it as a government-run savings program. While many of the characteristics of Social Security are very similar to a pension, one aspect, survivor benefits, offers a few wrinkles that need to be carefully evaluated to maximize the benefit.

Social Security payments can be an important element in determining the ongoing cash flow for a surviving spouse, who can be entitled to receive the amount to which the deceased spouse had earned. This amount will be 100 percent of the deceased's benefit, if taken after the surviving spouse reaches his or her full retirement age, which is age 66 for those born between 1943 and 1954. In these days when women are increasingly likely to be entitled to Social Security benefits on their own, taxpayers need to develop a strategy to coordinate and maximize these distinct payouts.

The benefits of a surviving spouse are based on the insured worker's primary insurance amount which is the monthly payment being received on the date of death. To be eligible for the surviving spouse benefit, the survivor must be at least age 60 (age 50 if disabled) and must have been married to the deceased for at least nine months before death occurred, or be the parent of the insured's child. Remarriage of the survivor can cause cancelation of benefits in certain instances so be aware of that fact.

Ultimately, if one postpones the collection of Social Security until full retirement age, it allows the beneficiary an annual increase of 8 percent in the amount received. Surviving spouse benefits reflect delayed credits, meaning that if the deceased spouse had deferred taking Social Security, the higher benefit will be passed on to the surviving spouse.

Below is an example of this hypothetical situation:

David and Susan are married. David's full retirement age is 66. At age 66, David has a $2,000 benefit based on his historical earnings record. If David delays receiving his benefit, he receives an 8 percent annual credit, so at 67 his annual benefit goes up to $2,160. If he passes away at 67, Susan will receive the full $2,160 annual benefit.

One can elect to collect Social Security before full retirement age, but the benefits received will be at a reduced amount. Age 62 is the earliest age to collect on your own benefits, but the benefit is reduced by 25 percent. A surviving spouse is able to collect a reduced benefit as early as age 60, however, the benefit is cut by 29.5 percent. The wrinkle for a surviving spouse is that they have the option to switch between their own benefit and the surviving spouse benefit, whichever is larger. This option to convert can be a great financial planning tool that is not available to those taking spousal benefits before full retirement age. Postponing the greater of the two payouts is a strategy utilized to optimize payouts.

Below is an example of this hypothetical situation:

Susan is a 62-year-old widow with her own benefit of $1,100 and a survivor's benefit of $2,000. Susan could file a restricted application to take her own reduced benefit of $825 and convert to a survivor's benefit of $2,000 at age 66.

If the payouts between the deceased and surviving spouse are close to the same amount, that could play out as follows: Stacy is a 60-year-old widow with her own benefit of $1,900 and a survivor's benefit of $1,700. She could apply for the reduced survivor's payout of $1,216 then at age 66 convert to her own benefit of $1,900 or, by waiting, receive even more benefit by virtue of delayed credits. One should be aware that an earnings test is applied to a survivor's benefit, and a person collecting before full retirement age will have payouts decreased. The excess earnings threshold before benefits are decreased in 2014 is $15,480.

The general trend recently has shown that the number of people taking Social Security benefits at the earliest possible moment is decreasing, which is a positive trend in light of advanced life expectancies for both men and women. Decisions regarding when to begin receiving Social Security benefits have an impact on not only the individual, but also the surviving spouse. If an individual decides to collect Social Security as early as possible, they can miss out on opportunities available if they had waited until full retirement age. When an individual wants to minimize the risk of outliving your benefits, they would want to delay receiving benefits as long as possible. If an individual satisfies their life expectancy, waiting to claim benefits usually results in the optimal payout.

For more information or questions on this topic, please contact your professional at UHY LLP in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040, or visit us on the web at http://www.uhy-us.com.

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    UHY LLP
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