Social Security’s Delayed Retirement Credits

Here’s a simple example: A client’s primary insurance amount (or PIA, the amount a person would receive at their FRA) is $2,500. The client’s FRA is 67. Delaying benefits for three years, until age 70, means their benefits would increase by 24% to an estimated $3,100 monthly. That’s nearly $7,200 more per year from Social Security.

Do you have your clients’ attention now?

Waiting Can Mean More Money For A Widowed Spouse
Married clients have more at stake when making Social Security plans because a widowed spouse is eligible for 100% of the deceased spouse’s benefit. For some, that can be significant. 

Let’s look at an example. Harry filed for benefits at his full retirement age, 67. He receives a monthly benefit of $3,250. A few months younger, Sally files for a spousal benefit, equal to half of that, or $1,625. They receive $4,875 in monthly benefits and $58,500 in annual income.

Unfortunately, Harry passes away at 73. Sally loses her spousal benefit but retains Harry’s benefit, $3,250 a month, or $39,000 a year. That’s almost $20,000 less to run the household she and Harry had. Depending on what other assets they owned, that could mean a change in lifestyle for Sally.

If Harry had waited to file for benefits until 70, maxing out his DRCs, his benefit would have been about $4,030. Sally would have had to delay receiving a spousal benefit until Harry filed. But at Harry’s death, assuming she had reached her survivor FRA, Sally’s monthly and annual benefits would have been $4,030 and $48,360. 

This simple example assumes Sally didn’t qualify for a benefit higher than Harry’s based on her work record. But it illustrates how important it is for Social Security planning to be a family affair, assisted by sophisticated benefit planning tools available to advisors. The tools can model various filing options for individuals and couples.

It’s worth noting that DRCs can also affect the benefits a divorced spouse qualifies for. For some families, that could matter.

No Need For FOMO: COLAs Still Count
You can assure clients with a fear of missing out (FOMO) that waiting to accumulate DRCs will not cost them any cost-of-living adjustments (COLAs) the government declares between when they turn 62 and the age they file. Instead, their benefits will be adjusted based on the sum of COLAs between those years.

COLAs are based on inflation and are designed to help shield older Americans from the effects of higher prices of goods and services they use, including food, housing, transportation and medical care.

This year Social Security beneficiaries received a giant COLA—8.7%. The year before, it was 5.9%. With inflation easing somewhat, the Senior Citizens League predicted recently that the 2024 COLA would be lower, at 3%. The official announcement happens every October.

Word Of Caution
Clients usually must wait for DRCs to be included in their benefits. How long depends on what month their birthday is.

• Anyone who files after full retirement age and before 70 won’t receive DRCs in their benefit payment until January of the year following the year when they were earned.

• Anyone who waits until 70 will receive them in their first Social Security benefit payment.  

So, set expectations when doing Social Security benefit planning and optimization.  

Clients May Be Eligible For A Do-Over
Lives can change quickly. Perhaps a client retires but is wooed back to work or receives an unexpected gift or bequest and can now afford to delay Social Security. The SSA has some options.

Tread carefully, however. A benefit suspension also applies to anyone (such as a spouse) who receives a benefit tied to a worker’s record (and they can’t earn delayed retirement credits).

To Delay Or Not? You Be The Guide
Delayed retirement credits acknowledge the actuarial facts of life. The government expects to pay anyone who files at age 62 for longer than it will pay benefits to those who file later. For clients who can work until they are 70, we have five ideas for how to help them.

Too many clients jump at filing for Social Security as soon as possible. Emotion, not logic, often drives those decisions. And many people today underestimate the chances and the financial risk of living long lives.

If you’re wondering when to ask clients about their plans for Social Security, take my advice: It’s seldom too early. But it’s often too late.

Alyson Dorosky, CSSCS, is LifeYield Head of Social Security Support. She has seen thousands of different Social Security scenarios in five years of working with advisors and their clients to customize filing strategies and maximize retirement income.