Recently there was an article that I was involved with where we were reviewing the strategies of taking a restricted spousal benefit and therefore delaying your own benefit versus taking your own benefit. An astute reader (Thanks BL!) pointed out that there was a bit of a flaw in the logic on the costs of delaying, and therefore a significant difference in the breakeven period.
Briefly, the example went as follows:
Say the wife, Michelle, has a PIA of $1,300 and Mike has a PIA of $2,500. They’re both age 66, and Michelle files the restricted app and is eligible to receive $1,250 (half of Mike’s), which is only $50 less than she would receive if she filed for her own benefit. After four years of delay, she has given up $2,400 ($50 times 48 months) but now her benefit is $1,716 – $416 more than she would have received at age 66. At that rate, she makes up the foregone $2,400 in less than six months.
Here’s the problem:
The example assumes that there is a one-time choice to be made between taking the spousal benefit and taking Michelle’s own benefit. In reality, this choice is made every single month after that first month. Michelle is choosing to continue receiving the spousal benefit versus her own benefit. Her potential foregone benefit increases with each passing month! So in other words, the $2,400 that I estimated above was actually very much understated.
After the first month has passed, if Michelle makes the choice to stay with the spousal benefit, the amount of increased benefit that has been foregone is now increased to $58.70 for the current month. This is because the Delayed Retirement Credit (DRC) is 2/3% per month of delay past her Full Retirement Age. So, since Michelle is making the choice every month to continue receiving the spousal benefit, the amount of her own foregone benefit increases every month between FRA and age 70.
For the example at hand, if you consider the increase every month, Michelle is actually foregoing a total of $12,176. This is, as noted, a significant difference from the figure of $2,400 that I used in the original article. The recommendation is the same though, as it still makes sense for Michelle to delay her own benefit until age 70 and receive the spousal benefit during that four years.
The amount of Michelle’s own benefit that she has foregone during this four year period, $12,176, will be made up by her increased retirement benefit that she can receive upon reaching age 70. At this stage (not including Cost of Living Adjustments) she will be eligible to receive $1,716, which is an increase of $466 per month. With this additional benefit amount, Michelle’s breakeven point against the foregone $12,176 is a little less than 30 months, or 2½ years.
Understand that this outcome is specific to the example that I outlined above. The amount of your own benefit and the amount of the spousal benefit will change the outcome and breakeven point for your own circumstances. The other point that is not worked out with this example is the overall couple’s benefit – which is important to work out as well. If Michelle chose to use her own benefit at FRA, Mike could file a restricted application at that point. This would result in a less-optimal outcome, but these projections should be done as well in working out your plan for Social Security benefits.
I hope the original article didn’t cause too much confusion – this should set the record straight.