It’s incredibly hard to lose a lifelong spouse, and the weeks following a funeral are undeniably tough on the surviving spouse.
But that’s exactly when many recently widowed people are expected to make consistent decisions about their finances, choices that can earn them thousands of dollars in income each year during retirement.
The reason why is Social Security.
Read: The Crushing Financial Punishments for Marriage in Your Later Years – Courtesy of Uncle Sam
A new widow can claim her late husband’s monthly payment instead of her own. This often turns out to be considerably more money per month if, for example, the husband was the breadwinner.
Simple, right? Of course not.
There are many moving parts here. It seems logical to switch immediately and receive the larger Social Security check from a deceased spouse. But not always.
Consider these three scenarios:
Scenario No. 1
This one is easy. You are both 70 years or older and will receive all your maximum monthly payments. If the deceased spouse’s check is larger, go ahead and take his monthly payment instead of yours.
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Scenario No. 2
The new widow hasn’t started taking Social Security yet, but the late husband was collecting it.
Defer your own check here and take the man’s larger payment for now. That’s because the widow’s monthly Social Security benefit will grow at 8% per year simply by waiting until age 70 to cash a check.
If your check is bigger once you hit 70, switch back. If not, stay on the spouse’s check.
Read: “You don’t want to die at your desk sending an email.” Beyond the numbers, are you ready to retire?
Scenario No. 3
From here it gets complicated.
In this scenario, the widow has already applied for Social Security, but wants to switch and take the deceased spouse’s monthly payment, which is higher. You have a one-time right to withdraw your social security application within 12 months of commencement. You must, however, repay any money you have already received.
Also consider the possibility of complications from additional sources of income, such as pensions and mandatory benefits from retirement plans. After a certain income level, you will be taxed on Social Security at the federal level.
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Twelve states also tax Social Security benefits based on your retirement income and other factors. Those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Basically, depending on your age, where you live, and how much you earn in retirement, the potential total amount you receive from Social Security can vary quite a bit.
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It pays to have each choice examined by a professional and provide a careful analysis of the long-term results. Which path forward puts the most money in your pocket?
Of course, the best defense is a good offense: take the time to talk with a qualified financial planner well in advance about how to protect and grow all of your wealth for the long haul.
That includes retirement money a surviving spouse inherits through beneficiary designations, real estate, taxable investments, and income streams such as military benefits, private annuities, and Social Security.
Getting the order of income just right — maximizing cash monthly and minimizing taxes — is a crucial conversation with a finance professional.
It can be a difficult conversation to have, but it’s an important one. Starting early with a fiduciary financial advisor can make all the difference years later.
Christie Whitney is a certified financial planner at Rebalance. Follow her on LinkedIn or Twitter @Rebalance360.