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The Real Breakeven Point for Delaying Your Own Social Security Benefit and Taking the Spousal Benefit

Balanza de la Justicia

Balanza de la Justicia (Photo credit: Wikipedia)

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.

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Know Your Options When Talking to Social Security

Cardpunch operations at U.S. Social Security Administration

When you get ready to file for your retirement benefits, it’s important to understand what options are available to you before you talk to the Social Security Administration.  There are many ways to get a good understanding of your options, including working with your financial advisor, reading up on the subject (this blog is a good place to start!), and talking to friends and relatives who have already gone through the process.

The reason it’s important to know your options is because the Social Security Administration staff that you may encounter are not trained to help you maximize your lifetime benefits – they are trained to help you maximize the benefit that you have available to you today.  Often the options that the SSA staff present to you are not the best options for you in the long run.  In addition, SSA staff are absolutely overwhelmed by the volume of folks that they are in contact with.  As I understand it, disability claims are backlogged by as much as three years in some cases – so you can imagine how difficult it is for the staff to handle new, unusual cases.

Listed below are a few examples that I’ve heard recently where folks have gotten erroneous or incomplete responses to basic questions presented to SSA staff.  This is not intended to be an exhaustive list, just a few things I’ve heard about recently.

Restricted Application

An husband, age 66, wishes to delay his filing to age 70.  At the same time, his wife, age 62, is filing for her own benefit today.  The husband wishes to file a restricted application for spousal benefits only – which would allow him to receive a benefit equal to half of his wife’s PIA (not her reduced benefit) while he continues to delay his own benefit to age 70.  SSA staff told him that since his own benefit would be greater than half of his wife’s PIA, he would not be able to do this.

Of course, if you’ve read this blog or my book, you know that this is incorrect.  The man called me and asked about it – and I told him to go back to the SSA and make the request again, specifically requesting to file a “restricted application for spousal benefits only”.  I then recommended that if he still received a negative response to request to speak to a supervisor about it.  Eventually, with this guidance, he was able to get the benefit that he asked for.

“Bonus” Lump Sum

If you are over Full Retirement Age (age 66 these days) and you go to or call the Social Security Administration to file for retirement benefits, you may be presented with an option for a “bonus” lump sum of up to six months’ worth of benefits, to be paid to you when you receive your first check.  Don’t fall for it without knowing what’s going on!

What is happening is that the SSA staff is suggesting an option to you that is available – of retroactively applying for benefits six months prior to the actual date.  Effectively, if you are (for example) 67 years old when you take this option, you will be filing as if you are 66 years, 6 months of age.  This will reduce your Delayed Retirement Credits by that 6 months, or 4%.  You’ll end up with a lump sum check for the six months that you hadn’t received up to that point, but your future benefits will be 4% less than they would have been had you filed at your attained age of 67.

If this is what you want, then go for it – but realize that not only is your own future benefit going to be permanently reduced from what it could have been, any survivor benefits that your spouse will receive are also reduced.

Divorcee planning

A divorced person who is qualified to receive benefits based upon her ex’s work record often has difficulty in planning when to receive benefits.  This is especially troublesome if you are pretty certain that your Spousal Benefit will be significantly more than your own benefit, and you’d like to maximize that benefit.  The trouble is that you may not have access to the complete information about your ex’s benefit (and therefore, any spousal benefit you could receive).

The key to this is to have the correct documentation about your situation when you talk to Social Security.  Most often, this is going to require a visit to the local office, although I’ve been told this can be done over the phone.  I assume in a case like that there are several calls involved because you’ll have to send your documentation for the SSA to verify.

At any rate, if you have your marriage license and your divorce paperwork, which show that you were married for ten or more years and the divorce occurred more than two years ago, along with your ex’s Social Security number and date of birth, the SSA staff will be able to provide you with information about what benefits you are eligible to receive based on the ex’s record.  Without this documentation, you will be denied access to the information.

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Another Good Reason to Delay Social Security Benefits

B. H. DeLay

As you likely know from reading many of my articles on the subject, I have long advocated the concept of delaying your Social Security benefit as long as possible.  This shouldn’t be a surprise – many financial advisors have espoused this concept for maximizing retirement income.

Lately there has been a white paper making the rounds, from a Prudential veep, Mr. James Mahaney, entitled Innovative Strategies to Help Maximize Social Security Benefits.  The white paper supports the very theme that I wrote about a couple of years ago in the post Should I Use IRA Funds or Social Security at Age 62?.  This paper seems to have struck a chord with a lot of folks, as I’ve received it no less than a dozen times from various folks wondering if the strategies Mr. Mahaney writes about would be useful to them.

The point is very clear: It makes a great deal of sense and saves significant tax money later in life when you can maximize the amount of Social Security income as a percentage of your overall income requirements.

I’ll run through an example to help explain how this works:

We have an individual who has a pre-tax income requirement of $75,000 per year. The individual has significant IRA assets available. If he takes Social Security at age 62, he will receive $22,500 per year. Delaying Social Security benefits to FRA would get him $30,000; waiting until age 70 would provide a benefit of $39,600 per year. In tables below we show what the tax impact would be for using Social Security at age 62, FRA, and age 70. In each case the required income is always $75,000.

Table 1 – taking Social Security benefit at age 62:

IRA SS Tax
62 $ 52,500 $ 22,500 $ 9,556
63 $ 52,500 $ 22,500 $ 9,556
64 $ 52,500 $ 22,500 $ 9,556
65 $ 52,500 $ 22,500 $ 9,556
66 $ 52,500 $ 22,500 $ 9,556
90 $ 52,500 $ 22,500 $ 9,556
Totals $ 1,522,500 $ 652,500 $ 277,113

Table 2 – taking Social Security benefit at age 66:

IRA SS Tax
62 $ 75,000 $ 0 $ 11,113
63 $ 75,000 $ 0 $ 11,113
64 $ 75,000 $ 0 $ 11,113
65 $ 75,000 $ 0 $ 11,113
66 $ 45,000 $ 30,000 $ 7,953
90 $ 45,000 $ 30,000 $ 7,953
Totals $ 1,425,000 $ 750,000 $ 243,263

Table 3 – taking Social Security benefit at age 70:

IRA SS Tax
62 $ 75,000 $ 0 $ 11,113
63 $ 75,000 $ 0 $ 11,113
64 $ 75,000 $ 0 $ 11,113
65 $ 75,000 $ 0 $ 11,113
66 $ 75,000 $ 0 $ 11,113
67 $ 75,000 $ 0 $ 11,113
68 $ 75,000 $ 0 $ 11,113
69 $ 75,000 $ 0 $ 11,113
70 $ 35,400 $ 39,600 $ 5,901
90 $ 35,400 $ 39,600 $ 5,901
Totals $ 1,343,400 $ 831,600 $ 212,811

The difference that you see in the tables is due to the fact that Social Security benefits are at most taxed at an 85% rate. With that in mind, the larger the portion of your required income that you can have covered by Social Security, the better. At this income level, the rate is even less, only 85% of the amount above the $44,000 base (provisional income plus half of the Social Security benefit). This results in almost $34,000 less in taxes paid over the 29-year period illustrated by delaying to age FRA, and nearly $65,000 less in taxes by delaying to age 70.

Note: at higher income levels, this differential will be less significant, but still results in a tax savings by delaying. It should also be noted that COLAs were not factored in, nor was inflation – these factors were eliminated to reduce complexity of the calculations. In addition, in calculating the tax, deductions and exemptions were not included.

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Are You Leaving Social Security Money on the Table? You Might Be, If You Don’t Understand and Use This One Rule

A handsome couple

Many couples that have done some planning with regard to filing for Social Security retirement benefits have figured out how to coordinate between the higher wage earner’s benefit and the lower wage earner’s benefit.  Often it makes the most sense to file for the lower wage earner’s benefit early, at or sometime near age 62, while delaying the higher wage earner’s benefit out to as late as age 70.

This method allows for a maximization of those two benefits.  If you’re really astute, you probably picked up on the concept of file and suspend, as well.  File and Suspend allows for the lower wage earner to increase his or her benefits by adding the Spousal Benefit, while the higher wage earner continues to delay his or her benefit, adding the delay credits.

Another little-known method that can be employed in specific circumstances is called the Restricted Application for Spousal Benefits.  This method provides one spouse or the other with the option of collecting a Spousal Benefit, while at the same time delaying his or her own retirement benefit.

First Example

Let’s work through an example to help understand the concept.

Joe and Jane are both age 62, and they have expected retirement benefits at age 66 (also known as a Primary Insurance Amount, or PIA) of $2,000 and $1,000, respectively.  The strategy that they intend to employ is for Jane to file now, at age 62, and then Joe will delay his benefit to age 70.  By doing so, Jane’s benefit will be reduced to $750 per month; after he reaches age 70, Joe will be eligible for an increased benefit of $2,640.

The normal usage of File and Suspend won’t work in this case, since Jane’s PIA of $1,000 is equal to 50% of Joe’s PIA of $2,000.  (If you need more information on File and Suspend, see this article.)  This is where the Restricted Application can apply.

As we know from prior articles on the subject, the Spousal Benefit is available to one spouse when the other spouse has filed for his or her own benefit.  In addition, we know that filing for a Spousal Benefit prior to Full Retirement Age (FRA) invokes deemed filing, which would require that all eligible benefits are filed for at the same time.  After FRA, deemed filing does not apply.

Back to our example, when Joe reaches Full Retirement Age (FRA, age 66) he can be eligible for a Spousal Benefit based upon Jane’s record.  In order to do this and still delay his benefits, he would file a Restricted Application for Spousal Benefits Only with the SSA.  This type of application restricts the filing solely to Spousal Benefits.  Since Joe meets the qualifications for receiving a Spousal Benefit and he’s at or older than FRA, he will be eligible to receive 50% of Jane’s PIA as a Spousal Benefit, while still delaying his own benefit.  Deemed filing doesn’t apply since he’s older than FRA.

In doing this, Joe will receive $6,000 per year for four years, or $24,000 (Cost-of-Living Adjustments have been left out of our example for the sake of clarity).  If Joe didn’t know about this special rule, that’s money that he would never have received at all, money left on the table.

This method will also work if the couple are farther apart in age, and if their benefits are farther apart.

Second Example

Here’s another example:

Mike is 66 and Michelle is 62.  Michelle has a PIA or expected age 66 benefit of $1,800, and Mike has just filed for his own benefit in the amount of $800 per month.  In order for the couple to maximize Michelle’s benefit by delaying her filing to age 70, she can file the restricted application at age 66, FRA, and receive 50% of Mike’s benefit while continuing to receive the delay credits out to age 70.  When she files for her own benefit age age 70, Mike can then file for a Spousal Benefit, which would increase his own benefit by $100 for the rest of his life.  This is because 50% of Michelle’s PIA of $1,800 is $900.  Subtracting Mike’s PIA from that amount leaves $100 for Mike’s Spousal Benefit increase.

Third Example

Bob is 58 and his wife Roberta is 62.  Roberta has a PIA of $2,000, and Bob’s projected PIA is $700.  Roberta intends to delay her benefit to the maximum amount, age 70.  Bob will file for his own benefit at age 62, and as such his benefit will be reduced to $525.  At that time Roberta will be 66, and so she could file and suspend, which would provide Bob with an opportunity to increase his benefit by adding the Spousal Benefit.  If they did that, the Spousal Benefit increase would be $210 ( after reduction since he’s under FRA), bringing his total benefit to $735.  Roberta is not receiving a benefit at all at this point, she’ll receive her first benefit at age 70.

However, if at age 66 (FRA) Roberta were instead to file a restricted application for spousal benefits (instead of filing and suspending to allow Bob to file for the Spousal Benefit), the Spousal Benefit that she’d receive would be $350.  She can do this since she’s at age 66 and Bob has filed for his own benefit.  The Spousal Benefit of $350 is $140 more than the Spousal Benefit that Bob would receive under the File and Suspend strategy.  She would receive this $350 benefit until she reaches age 70 and files for her own benefit.  Then Bob could file for the Spousal Benefit at that point, increasing his overall benefit by $300, to a total benefit of $825.

If the couple didn’t use the second method, they’d be leaving $6,720 on the table, and unnecessarily leaving Bob with a lower benefit for life.

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Can I Switch to My Spouse’s Benefit At FRA?

THE SOUTH BEACH AREA OF MIAMI BEACH

This is a question that comes up pretty frequently, in several different flavors.  Basically, here’s the full question:

I started benefits at age 62, and now I’m 66 (Full Retirement Age) – can I switch over to my spouse’s benefit now that I’m age 66?  And will it be based on his benefit when he was 66, or his benefit now.  (He’s 70 now, and has been collecting benefits since he turned 66.)

There are a couple of questions being asked here, and I’ll cover them one-by-one.

Can I switch to my spouse’s benefit?

The wording here is troubling, because the asker specifically wishes to “switch” to another benefit.  If an individual is already receiving retirement benefits, the spousal benefit is not a “switch”, but rather an “addition” to the retirement benefit.

The second issue is implied, and maybe not troublesome to the question at hand.  The Spousal Benefit at Full Retirement Age (FRA) is 50% of the other spouse’s Primary Insurance Amount.  The implication is that the asker could receive the same benefit as her spouse – and this is not the case.  Half of the other spouse’s Primary Insurance Amount (PIA) is the maximum Spousal Benefit.

So here’s how the Spousal Benefit is calculated:

  • half of the other spouse’s PIA minus your own PIA;
  • if you’re younger than FRA the result will be reduced to as little as 65%;
  • if you’re at or older than FRA, there is no reduction to the result of the first step;
  • the resulting amount is added to your own benefit, to result in your total benefit.

See the article, Social Security Spousal Benefit Calculation Before FRA for more detail on how exactly this all works.

What Will My Benefit Be Based On?

In the example question from above, the asker indicates that her husband filed for his own benefit at age 66, and now he’s age 70.  So what amount is a spousal benefit based upon?

In this case, the amount of the spousal benefit would be based upon the amount that the husband is currently receiving – assuming that he had filed at exactly his own age 66, Full Retirement Age.  If he filed at exactly that age, his benefit is equal to his Primary Insurance Amount (PIA) – which over the intervening four years has been increased by Cost of Living Adjustments (COLAs).

If the husband in question had delayed his benefit to age 70 to receive the Delayed Retirement Credits (for more on Delayed Retirement Credits, DRCs, see the article A File and Suspend Review at the link), then the spousal benefit that that asker would receive would be based upon the amount that the husband would have received had he filed at FRA, which would have increased by COLAs.

Hope this helps to clear up this question!

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Increase Your Social Security Benefit After You’ve Filed: File and Suspend Doesn’t Have to Be All at Once

Suspended

We’ve discussed the File and Suspend activity many times on this blog, but most of the time we refer to the activity as happening all at the same time.  This is because very often we’re talking about one spouse setting the table for the other spouse to begin receiving Spousal Benefits.

There is another situation where File and Suspend could be used – you could earn delayed retirement credits after you had already started receiving your retirement benefits by suspending your benefit.  You must be at least Full Retirement Age (FRA) when you do this, but it could work in your situation.

Say for example, you started receiving your benefit at age 62.  At that point you were retired, and you intended to just play golf for the rest of your life.  After about 180 holes a week for the first two years, you decide that you’d rather poke yourself in the eye than listen to the same old stories from your duffer buddies again, and you go back to work.

As you return to work, it turns out that you’re earning much more than the earnings limits allow, and as such your retirement benefit is completely withheld.  There’s not much you can do about it since you’re only 64 at this point, so you just let SSA do their thing – knowing that you’ll get your payback in credits for those months when your benefit was withheld after you reach FRA.

But, when you reach FRA, you’re still working – and you don’t need the Social Security benefit to live on.  At this point you could Suspend your application and stop receiving benefits altogether (since you haven’t been receiving them anyhow) and begin accruing Delayed Retirement Credits (DRCs) on your benefit.

If your FRA was 66, you could accrue 32% (8% per year or 2/3% per month) in DRCs.  Your new benefit would be calculated in a rather convoluted fashion by reducing the benefit for the two years that you received them (between ages 62 & 64) and then increasing the benefit by the 32% of DRCs.

So if your Primary Insurance Amount (the unreduced benefit that you would have received at FRA) was $2,000, since you had 24 months of early benefits the first part of the calculation would be to reduce that $2,000 by 13.34% (6.67% per year).  Then that amount would be increased by the DRCs that you accrued, 32%.  So:

$2,000 times 86.66% times 132% equals $2,287.80

The total benefit that you could receive at age 70 would be $2,287.80 – although your PIA could have adjusted due to your additional earnings, if those earnings replaced lower earning years on your record.

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It Pays to Wait For Your Social Security Benefits

Social Security Poster: old man

Image via Wikipedia

It’s usually best, for most things in the financial world, to act now rather than waiting around. The notable exception is with regard to applying for Social Security benefits. We’ve discussed it before (in fact part of this article is a re-hash of an earlier post) but it is an important point that needs more emphasis, in my opinion. As you’ll see from the table below, if you’re in the group that was born after 1943 (that’s you, Boomers!) you can increase the amount of your Social Security benefit by 8% for every year that you delay receiving benefits after your Full Retirement Age (FRA – see this article for an explanation).

Delaying Receipt of Benefits to Increase the Amount

If you are delaying your retirement beyond FRA, you’ll increase the amount of benefit that you are eligible to receive. Depending upon your year of birth, this amount will be between 7% and 8% per year that you delay receiving benefits – which can be an increase of as much as 32½% if you delay until age 70 and you were born in 1941 – when your FRA is 65 years and 8 months, and the increase amount is 7½% per year at that age. See the table below for the increase amounts per year based upon birth year:

Birth Year FRA Delay Credit Minimum (age 62) Maximum (age 70)
1940 65 & 6 mos 7% 77½% 131½%
1941 65 & 8 mos 7½% 76% 132½%
1942 65 & 10 mos 7½% 75 5/6% 131¼%
1943-1954 66 8% 75% 132%
1955 66 & 2 mos 8% 74 1/6% 130%
1956 66 & 4 mos 8% 73% 129%
1957 66 & 6 mos 8% 72½% 128%
1958 66 & 8 mos 8% 71% 126%
1959 66 & 10 mos 8% 70 5/6% 125%
1960 & later 67 8% 70% 124%

So you can see the impact of delaying receipt of retirement benefits – it can amount to more than 50% of the PIA (Primary Insurance Amount), when you consider early benefits versus late benefits. Of course, by taking benefits later, you’re foregoing receipt of some monthly benefit payments; given this, early in the game you’d be ahead in terms of total benefit received. This tends to go away as the break-even point is reached in your mid-70′s to early-80′s in most cases, which we’ll review in a later article.

An Example

Here’s an example of the benefit of delay in action: You were born in 1954, and as such your FRA is age 66. According to the benefit statement you’ve received from Social Security, you are eligible for a monthly benefit payment of $2,000 when you reach your FRA (which would be in 2020). If you delayed applying for your benefit until the next year, your monthly benefit payment would be $2,160 per month – an increase of $1,920 per year. If you delayed until age 68 (two years after FRA), the monthly payment would be increased to $2,320, for an annual increase of $3,840. At age 69, delaying would increase your annual benefit by $5,760, and at age 70, your monthly payment would be $2,640, for an annual benefit of $31,680 – $7,680 more than at FRA. This amounts to a 32% increase in your benefit by delaying receipt of the benefit by 4 years!

Notes

It’s important to note that this is not a compounding increase – that is, your potentially-increased benefit from one year is not multiplied by the increase for the following year. The factor for each year (or portion of a year) is simply added to the factor(s) from prior years. You also don’t have to wait a full year to achieve the benefit – this delay is calculated on a monthly basis, so if you delayed by 6 months your increase would be 4% over the FRA amount. The biggest benefit of this is that you can not only increase the amount you will receive over your lifetime, but also the survivor benefit that your spouse will receive upon your passing. For some folks this can make a huge difference as they plan for the inevitable.

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