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Delayed Retirement Credit

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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A Quick and Dirty Way to Determine Your PIA

PIA box

We’ve gone over the long, painful, detailed way to calculate the Primary Insurance Amount (PIA) in many different articles and my book.  The PIA is central to most of the calculations we do, such as your own benefit (reduced or increased if you file early or late), survivor benefits, and the like.

Sometimes it is difficult to actually know find out what your PIA actually is.  Here’s a quick and dirty way to figure it out:

Go to the Social Security website and get your statement (www.socialsecurity.gov/mystatement).  On page 2 at the top you’ll see either your Full Retirement Age (FRA) benefit amount, or the amount at your current age if you’re over FRA.  Oftentimes we refer to this FRA amount as your PIA, but nearly always with a qualification.  This is because the benefit amount illustrated on this statement is assuming that you continue earning at your current level between now and Full Retirement Age.  What if you died today, what is your PIA today, if no more earnings went on your record?

In addition, if you’re over FRA that amount will not equal your PIA, it will be your DRC-enhanced (Delayed Retirement Credit) benefit amount.  Keep reading down the page.

When you get to the part about the benefit for your surviving spouse who has reached Full Retirement Age – that’s the ticket!  This amount is always equal to your current PIA, without any enhancement by future earnings.  A way to double-check this figure is to take the benefit for your surviving child under age 18 and divide by .75, since a child under age 18 is due a benefit equal to 75% of the decedent-parent’s PIA.  The amount should come out equal (roughly) to the surviving spouse figure.

And that’s it – now you can go off and do your calculations based on your current PIA.  Keep in mind that if you’re younger than age 60 your calculations are likely to depart quite a bit from the way reality will work out.

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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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The Value of Your Social Security Benefits

Improve the present hour

As you consider your Social Security benefits and when you might begin to draw them, keep in mind that the benefits you’re receiving are actually akin to an annuity – a stream of income that you will receive from the time you start the benefits throughout your life.  As with an annuity, if you live longer than average, you will receive much more than the original value (premium) of the annuity.  If you have a way to increase the amount of the stream of income, by delaying start of the benefits, the overall amount that you eventually receive will increase as well (assuming you live longer than average).

Let’s say that your Social Security benefit would be $1,500 at Full Retirement Age.  If you started your benefit early at age 62, your benefit would be reduced to 75% of that amount, or $1,125; if you delayed your benefit to age 70, the benefit amount would be increased by 32% to $1,980.

If you started receiving benefits at age 62 and you lived to age 75, the total benefit that you receive over your lifetime would be $189,000 – not including Cost of Living Adjustments.  In a similar manner, calculating the total lifetime benefit if you started receiving benefits at Full Retirement Age (FRA, age 66 for folks reaching that age these days) comes out to $180,000 if you live to age 75.  Waiting to age 70 to start benefits results in a lifetime benefit (to age 75) of only $142,560.

So if you only live to age 75, it makes the most sense to start your benefits as early as possible.  But read on…

What’s interesting about this sort of calculation is that if you live beyond age 75, say to age 80, now your lifetime benefits are starting to be greater by delaying a bit.  If you start at age 62, the total lifetime benefit would be $256,500 through age 80; starting at 66 results in $270,000 over your lifetime.  Delaying to age 70 still results in a lower lifetime benefit at this age – only $261,360.

So if you happen to live even longer, let’s say to age 90 – now the later you’ve delayed results in the greatest overall lifetime benefit.  Starting at age 62 results with a total lifetime benefit of $391,500; 66 amounts to $450,000, and beginning at age 70 yields $498,960.

What about the value of that income stream in today’s dollars?

There’s another calculation that we financial guys do when evaluating things like annuities – it’s known as a Net Present Value (NPV) calculation.  Essentially what we do is to take the value of the cash flows and use a set rate of return to determine what amount of money we’d need in order to produce those cash flows at those times in the future.

So, for our example above, using a rate of return of 5%, we come up with the following net present values of the cash flows:

Age to start NPV to age 75 NPV to age 80 NPV to age 90
62 $133,632 $163,152 $204,404
66 $138,991 $186,834 $253,691
70 $120,598 $198,360 $304,631

As you can see, the NPV increases for your delayed receipt of benefits starting with a lifespan of age 80, and becomes more pronounced if you live even longer.  As we saw with the total lifetime benefit, there’s a higher value to the cash flow if you start early only if your lifetime is relatively short – in this case, to age 75.

Conclusion

This is the reason that we financial-types often recommend delaying receipt of Social Security benefits.  As the figures above attest, there can be a substantial lifetime benefit increase if you life beyond age 80 – in our example it comes to over $100,000 by changing your start date from age 62 to age 70 and you live to age 90.  Of course, if you don’t happen to live beyond age 80 (and who knows how long you’ll live?) starting earlier will likely result in the greater benefit for you in your lifetime.

Given that folks are living longer and longer these days, you should really consider delaying Social Security benefits as your strategy.  Keep in mind that we’re only talking about a single person’s benefits – for a couple, the calculations become infinitely more complex, as we have to account for two lifetimes, two potential benefits, and spousal and survivor calculations.  We’ll get to that next time…

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Wealth Defense: When Should You Start Social Security Benefits?

The foregoing is a re-post of an article that I wrote which was included in The Motley Fool’s Rule Your Retirement newsletter.  Enjoy!

Want to double a chunk of your retirement income? It’s easy — just delay taking Social Security by about six years!

OK, so it’s not really that simple. The time to apply for Social Security benefits is different for each individual; there is no magical “best age” for everyone. Thus, to maximize your benefit, it’s important to understand the consequences of choosing to apply at different ages.

It all starts with the most important age: your full retirement age, or FRA (see table below). If you receive your Social Security retirement benefit before your FRA, the benefit will be reduced. The biggest reduction is at age 62, the earliest you can begin receiving benefits (except for widows and widowers, who can begin survivors’ benefits at 60).

Year of Birth Full Retirement Age
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

The more you delay applying for benefits after your FRA, up to age 70, the more your benefit will increase. At 70, the benefit no longer increases. To show how age affects Social Security, the table below displays estimated annual benefits for a person born on June 1, 1950, who earned $60,000 last year (all amounts are in future, or inflated, dollars).

Worth the Wait?

Age Annual Benefit
62 $13,764
64 $17,064
66 $21,300
68 $26,796
70 $33,048

The SSA employs really smart actuaries who have the very fun job of poring over death statistics (which may or may not involve midnight visits to cemeteries — I can’t divulge my sources). These actuaries aim to coordinate the reductions and increases with average life expectancy so that it shouldn’t matter when you take your benefit; it should work out about the same no matter when you start. But average life expectancy hasn’t quite caught up with actuarial estimates. So, since the average life is slightly less than the crossover point, it’s a bit in your favor to start early if you’re the average person who lives to the average life expectancy.

Factors to Consider

Despite what the actuaries say, there are times to delay taking Social Security to increase the chances that you’ll receive the most bang from your benefits.

Will you live longer than average? About one of every four people age 65 today will live past age 90; one in 10 will live past age 95. So if your family leans past the occasional octogenarian, add longevity to your equation. When delaying benefits, the break-even point usually ranges from age 78 to 82. It’s no coincidence the average life expectancies for men and women in the U.S. are about 76 and 81, respectively.

Will you continue working? You can receive Social Security while still earning a paycheck, but doing so before your FRA could reduce your monthly benefit, depending on how much you’re earning. This is made up for when you reach FRA, but it’s important to know so that you can plan for the benefit reductions. Also, if you continue to work while receiving benefits, you’ll continue accruing credit for your annual wages. If you have earlier years on your record with low (or no) wages, your benefit could increase.

Do you really need the money? If you’re ill, have a shortened life expectancy, or face limited resources, it may be necessary to take Social Security early. The financial calculations I do for my clients always assume the recipient will live to at least 80 and can use other resources until age 70. If one or both of these circumstances is not the case for you, it probably makes more sense to take your benefits earlier.

Do you have a spouse or dependents? The age you apply for benefits locks you into a benefit base for the rest of your life. (Technically, you can get a do-over within 12 months of filing if you give back all the money.) Your benefit base might affect your spouse’s benefit, both when you’re alive and if you die first. The benefit base can also determine payments to other family members. We’ll delve more into this next month, when we explore strategies for maximizing family benefits.

Let the Numbers Do the Talking

Want to see how application age can affect your benefit? The SSA has a collection of online Social Security calculators to help estimate your benefit amounts at various ages, which can help you in your decision-making.

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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Why It Can Be So Important to Delay Social Security Benefits

BH Delay

It seems like every time I write an article about Social Security benefits that includes a recommendation to delay benefits, I get a lot of responses from well-meaning folks who disagree, sometimes vehemently, with the conclusions.

There are several points of view that I see in the responses, all believing that you should start taking benefits as soon as you’re eligible:

  • you never know how long you’re going to live;
  • Social Security is going broke, we all know it;
  • IT’S MINE, DADGUMMIT, THEY OWE IT TO ME; and
  • it’s all part of a huge conspiracy;
  • among other reasons too numerous to mention.

Believe me, I have no reason to recommend that people do something that isn’t in their best interests.  As a financial planner, my job is to help folks do things that are in their best financial interests all the time.  Sometimes those things that I recommend run counter to generally-accepted ideas, and sometimes the recommendations have certain assumptions or specific situations that must occur in order for them to work out the way we’ve planned.  But in all situations, the clients’ best interest is being met.

I don’t have an argument for IT’S MINE, DADGUMMIT, THEY OWE IT TO ME, other than to point out that this is an emotional response to a non-emotional decision.  This is a financial decision you’re making – it’s important to weigh the facts before making a choice.  Read on, we’ll get to the specifics of how to weigh the facts a bit later.

I also don’t have an answer to the conspiracy theory.  I just believe that it’s most likely not.  Feel free to think that’s a pollyanna way of looking at it, but that’s my position.  Maybe someday I’ll be proven wrong – but I’m going to continue not believing that somehow, someone else is benefiting from folks delaying Social Security.

I have addressed the concept of Social Security going broke in other articles.  Briefly, since it’s funded by tax receipts it can’t “go broke”.  Benefits can be reduced, or taxed at a greater rate than currently, or the tax rates could increase – but the system can’t “go broke”.

So that leaves the point of view that you never know how long you’re going to live.  I agree, there’s no way to know.  What we have to work with are averages – we know that on average most of us will live until somewhere around age 80, but that means some of us will die much sooner, some will die much later.  This is a conundrum – similar to Pascal’s Wager.

In Pascal’s Wager, we are to choose if God exists or if God does not exist (there is no in-between).  The gain by choosing that God exists is infinite, everlasting life in paradise, and the cost by choosing so is giving up worldly desires for the finite period of your earthly life.  The gain by choosing that God does not exist is present satisfaction with worldly desires. (This isn’t intended to be a theological discussion, so please excuse my brevity in explanation.)

Similar to Pascal’s Wager, if we choose to assume that we’ll live beyond the average, we’ll gain considerable benefits by delaying – and the cost is foregone benefits in our earlier years.  If it turns out that we die earlier than age 80, we will certainly have given up some overall benefits.  So we will have to make a decision.

In the context of all the things that I help folks to make decisions about, I often equate Social Security benefits to an investment account or IRA.  In doing so, we must figure out just what a Social Security benefit is worth, in real money, at various ages.  This is a relatively simple exercise using a spreadsheet to determine the Net Present Value of future cash flows.  In other words, how much money would I have to have in order to produce the same income as my Social Security benefit?

So let’s develop an example: a person has potential Social Security benefits of $18,000 per year if he starts benefits at age 62, or $24,000 per year if he starts at age 66, or $31,680 if he delays to age 70.  If he lives to age 82, these cash flows have Net Present Values of $299,035, $334,611, and $350,389, respectively, assuming a 5% rate of return on the underlying investment.

Given that the average person between the ages of 55 and 64 has something like $65,000 in savings, those values are pretty darned substantial, no matter how you look at them.  But the values can climb – especially if you are married and your spouse will be depending on your benefits after you pass.

Using the example from above, let’s say that the couple are presently ages 62 and 59 (doesn’t matter which one is older, husband or wife).  For the purpose of clarity, let’s say that the wife is the older of the two, and she’s also the higher wage earner over her lifetime – so her benefit is larger.  She lives to age 82, but he is only 79 at that time.  If he lives to age 82, her benefit will be paid out over an additional 3 years – and so then the Net Present Value of the benefit streams equates to $332,726, $383,155, and $419,547 respectively.

The point to all of this is that the delayed benefit is worth substantially more than the earliest benefit – in our first example more than $50,000, and almost $87,000 more in the one where the spouse lives a few years longer.  Given that the present value of the cash flow of the Social Security benefit can be increased to be worth nearly 7 times the value of the average retiree’s overall savings, which is akin to doubling the value of the savings amassed by age 70, if it’s at all possible to delay benefits, you should do so.

On the other hand, if in our example the couple lives only until the youngest is age 75, the delayed benefit still pays off – the amount of money you’d need for each of the options is $250,981 at age 62, or $251,747 at age 70.  If both members of the couple died at any point earlier than that, starting early pays off better in the long run.

So if you’re in a health situation where you don’t expect for you and your spouse to live beyond your respective age(s) 75, then perhaps you should start your benefits as early as possible.  If you live any time longer than that, it’s in your best interest to delay – especially the higher-earning spouse’s benefit – as late as you can.

Keep in mind, the tax benefits of Social Security have not been factored into this equation, nor have annual cost-of living adjustments.  Also, each person or couple’s situation is different, so it pays to work with a professional on your decisions about Social Security.

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