What happens to a retired couple’s Social Security benefits when a spouse dies?Often there is a substantial loss of income—a problem that has gotten surprisingly little attention.

The surviving spouse will get either the survivor benefit or his or her own retirement benefit, but not both. Social Security will pay the higher of the two amounts.

For example, Mr. Jones collects $2,500 a month and Mrs. Jones gets $2,000. After one dies, either survivor will receive $2,500 a month—a 44.4% drop in total benefits.

If one spouse’s benefits are small (or none), the impact on income will be small. But, when both spouses are collecting substantial benefits, as is often the case, there will be a substantial reduction that could last for many years.

While the death of a spouse reduces some ongoing costs, the decrease may not be large. If the survivor stays in the same home, property taxes or rent, utilities, insurance, and other monthly costs remain about the same.

One way to offset a decline in future Social Security benefits is with a lifetime income annuity. It provides a stream of guaranteed income that continues until death.

Joint annuity payments continue after spouse’s death

An income annuity can cover one person or both spouses. The big advantage of a joint income annuity is that it pays the same income stream after one spouse has died. It can thus help fill the gap from lower Social Security benefits.

You can choose either an immediate or a deferred income annuity. With a deferred income annuity, you choose the future date monthly payments begin.

For example, Mr. and Mrs. Jones deposit $100,000 in a joint lifetime deferred income annuity when he’s 67 and she’s 65. They decide to defer income for 13 years until Mr. Jones is 80. They’ll receive $943.73 a month (as of May 2021) for as long as either one lives.

Of that amount, only $326.53 will be taxable, as the remainder is considered nontaxable return of principal. If either spouse lives so long that the entire principal has been repaid, the income will continue and then become fully taxable. This is where the insurance aspect truly kicks in and why an annuity serves as longevity insurance.

Alternately, the Jones’s may decide to purchase an immediate income annuity. If they buy a joint lifetime immediate annuity with a $100,000 deposit, they’ll start receiving $424.96 a month ($80.74 taxable) right away, according to one insurer’s rates as of May 2021.

An immediate annuity could give them sufficient income so that they’ll be able to delay receiving Social Security benefits, perhaps until each is 70 when they’ll get substantially higher payments than if they started earlier. This can be a smart move if you’re in good health and are likely to live longer than average.

The couple could also hedge their bets by putting part of their money in an immediate annuity and part in a deferred income annuity. The latter will provide a raise in future income to keep up with inflation and offset lower Social Security benefits if one of them has passed in the interim.

Beyond the basic scenarios, calculating Social Security survivor benefits can be complex. AARP has an excellent summary, “How does Social Security work when a spouse dies.”

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. He writes on retirement income and annuities regularly for several leading financial websites. A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.