Social Security, Roth Conversions, and an Elaboration on Ed Slott

A reader would like information on the impact on her own retirement benefit of claiming the survivor benefit from her deceased husband.

"I am 59. My husband died when I was 42. I understand that I can receive his survivor benefit, which is around $734 monthly. I presently earn $109,000 a year, and I am working on retiring early, at age 62. My Social Security benefit will be much higher than his. I am thinking I should collect on his Social Security and use my savings, 401(k)s, etc., to supplement the balance I might need. But if I do this, and I do not work, does that hurt the amount of my Social Security benefit because I would have a couple years of no earnings?"

While this looks like a straightforward question, it does touch on several topics. To start, you have to be age 60 to claim a survivor benefit unless you're disabled, in which case you could claim it as early as 50.

To receive the full survivor benefit, you have to be at your Full Retirement Age (FRA) when you claim it. By claiming it earlier, you would receive a reduced benefit. (Claiming it at age 60, instead of at FRA, results in a 28.5% reduction.) In your case, we don't know if $734 is the amount of your survivor benefit at FRA, or if you have already reduced it to the amount if claimed at 60.

You mention wanting to retire at age 62. That means you would still be working during the two years between claiming the survivor benefit and when you stop working if you claim the survivor benefit at age 60. Survivor benefits – like retirement benefits – are subject to the earnings test. For any Social Security benefit, if you earn too much, Social Security will reduce the value of your benefit. In 2020, $18,240 is the most you can earn without a reduction.

The $109,000 you currently earn each year will cause a reduction of $1 in benefits for every $2 earned over the $18,240 figure. You will want to consider that, as the earnings test reduction will consume the entire survivor benefit and you won't get anything between ages 60 and 62. When you do stop working, the full benefit at age 60 will start being paid.

In the case of retirement benefits, when you reach FRA, Social Security will make up for the reduction it took. It doesn't come as a lump sum, but they do a recalculation and raise your monthly benefit a little bit to compensate.

But they won't do that for your survivor benefit: instead, the benefits lost to the earnings test are lost forever. Once you earn $18,240 or less, they will pay you what was defined as your benefit at age 60, but you will have received nothing for two years. At your present income level, claiming the survivor benefit brings no advantage until you stop working or reach FRA.

You mention that your Social Security retirement benefit will be much higher than your husband's. You're thinking of collecting his benefit initially and using your savings and 401(k)s to provide any additional income you may need. But what if you file for the survivor benefit and do not work past 62, you ask. Will that hurt your payment amount if you go for a couple of years with no earnings?

By age 62, you will likely have the 35 years of earnings needed to receive retirement benefits. But, not knowing the size of your benefit or how long you've been making $109,000 a year, we don't have all the critical information.

The two years of no earnings should not be a significant worry. Once you reach 62, Social Security formally establishes your PIA, your Primary Insurance Amount. That is your benefit at FRA. From age 62 forward, nothing you do earnings-wise can reduce that number. Your benefits can increase if you have additional earnings high enough to replace any of the top 35 earnings years they've used to calculate the PIA in the first place. After age 62, any work history can only help, not hurt. The only possible harm will be the lost opportunity if you choose not to add more high-income years of work.

However, most people overestimate the effects of a few extra years of earnings. Remember, they're taking your top 35 years to calculate your PIA, adjusting the earlier years for inflation. So, even if you replace some of the years in the 35 with higher-income years, it will have little impact. There are calculators available – including one on the Social Security website – to estimate the impact of different earnings on your benefit amount. You could add possible earnings for years that you keep working and see the benefit. Then remove them and see what you will miss out on. It's probably not that much.

Extra work years can make a big difference if some of the top 35 years have zero income. If you replace a zero in one year for $109,000, it's a significant change. But most people don't have any zeroes. And if you trade an $85,000 year for a $109,000 year, the difference is minimal because it's only one out of 35. That's how you might want to think of the effect of retiring at age 62 and not having a few more years at $109,000.

With the information you provided, it appears you would benefit from not filing for survivor benefits at 60, but at age 62 instead. (With your $109,000 salary, at 60, you would be locking yourself in at your lowest survivor benefit and wiping out any payments because of the earnings test.) If you retire from work at 62, ideally, you would continue living on the survivor benefit alone until age 70 (and not just to your FRA) if you can afford to supplement using your savings and investments for eight years. That would give you the highest lifetime-guaranteed, inflation-adjusted, government-backed income.

In today's low-interest environment, which is likely to last for some time, maximizing Social Security should be prioritized over acquiring any other source of additional income. No available private income annuity, for example, will give you more money than you gain for each year that you wait to claim Social Security. Annuity payments are based on your age, current interest rates and the term, whereas Social Security is safely based on your earnings history. We are big believers in income annuities, but we tell everyone, "First maximize your Social Security before buying an income annuity."

For you, waiting until age 70 is not a slam-dunk. But, having the survivor benefit, it's like being "paid to wait" with one benefit turned on. Within couples, one reason for having one person in the couple wait until 70 is to have the largest possible survivor benefit, but we don't know your status. More details would be needed to be able to say what would be the optimal approach.