Q: My 66 year–old husband recently passed away before starting Social Security benefits. I'm 63 and still working. I originally planned to wait until age 66 to start benefits, but I need extra income. Could you give me some ideas about when I should start?
A: Before doing anything else make sure you have a realistic budget, and think long term. You want your income and savings to be adequate as long as possible, 30 years or even longer is not unrealistic for someone your age. In developing a budget, look back over at least three years to include large expenditures for periodic home maintenance and repairs, transportation, medical costs and other large costs. Include what you pay in taxes. Once you get an expense figure, allow for at least 3% per year for inflation. Then tally up your income and assets, including the value and expected income from retirement accounts and pensions, if any.
You can apply for widow benefits as early as age 60, but if you start prior to your full retirement age, your benefits will be reduced. In addition, your benefits would be further reduced if you earn more than the annual earnings limit, which is $14,640 in 2012 ($1,220 per month). More on this in a moment.
This doesn't mean you should completely rule out starting widow's benefits. Depending on your finances, you may be able to start a reduced widow's benefit now and later switch to your own retirement benefits after your reach full retirement age or later if it would be higher than what you are entitled to now. If your own retirement would not be higher, then starting survivor's benefits now would lock in a permanently lower benefit.
Here's an example of how it might work: Let's say your husband was entitled to a benefit of $17,400 or $1,450 per month. Since he was at his full retirement age there are no reductions. You learn that your full retirement age benefit at age 66 would be about $1,195, and by age 70 it grows to about $1,640. In this case taking a reduced widow’s benefit now and letting your own benefit grow due to the delayed retirement credit may potentially work as long as your earnings don't completely offset your benefits.
Let's assume you are 30 months from attaining your full retirement age of 66. Your monthly widow's benefit would be reduced about 11.9% or $172.60 and you receive $15,328.80 or $1,277.40 per month ($1,450 - $172.90 = $1,277.40). Let's also assume you currently earn $30,000 a year. Under the earnings restriction rule your benefit would be reduced $1 for every $2 over the limit, while you are under your full retirement age. Your earnings are $15,360 over the annual limit ($30,000 – $14,640 = $15,360). Your benefits would be reduced by $7,680 ($15,360/2 = $7,680). That would leave you $7,648.80 in benefits ($15,328.80 – $7,680 = $7,648.80). Social Security will withhold your benefits for 6 full months and you would then receive your $1,277.40 monthly payment for six months.
This situation is only for 30 months though. Once you turn age 66 you can earn as much as you want without reduction to your Social Security benefits. Meanwhile you continue to work and delay your retirement benefit allowing it to grow. Once you reach age 70 you should go ahead and switch to your own larger retirement benefit, since it won't grow any larger.
The decision on when to start benefits is complicated and you should get counseling. The Social Security Administration website has a great deal of information on survivor’s benefits at www.socialsecurity.gov as well as contact numbers to reach counselors. For more information about working after starting benefits see How Work Affects Your Benefits Publication Number 05-10069.