With so many financial advisors recommending that clients maximize Social Security Delayed Retirement Credits (DRCs), it’s helpful to know a few nuances of DRCs that some clients may want to consider.

The top-line story is: “You can permanently increase your Social Security retirement benefit, and potentially your spouse’s survivor benefit, by 32% by delaying the start of benefits from age 66 until 70.”

While this is generally true, it doesn’t work that way for everyone.

For starters, a wrinkle in the way DRCs are paid jolts people when they receive their first benefit payment. The payment amount begins with a Primary Insurance Amount (PIA) and then adds DRCs earned plus any cost of living adjustments (COLAs).

However, benefits are only re-calculated once per year (in January) to add DRCs. In the worst case, if a person starts benefits in January, the DRC will not be added to PIA until the following January, and the first 11 checks will be DRC-less.

To maximize DRCs, it’s generally a good idea to wait until late in the year (October or November) to start benefits. To determine the DRCs payable starting the following January, for any given month, use Social Security’s calculator.

When a worker expects a spouse or dependent/disabled child to receive benefits on his/her Social Security record, the worker must have already filed for benefits, for the spouse or child’s benefits to begin.

There is no advantage to delaying the spouse’s benefits beyond normal retirement age (currently 66), because non-worker spouses do not earn DRCs. Their retirement benefits also do not participate in any DRCs the worker spouse has earned.

Here’s an example: John, age 65, is planning to delay the start of his benefits until age 70 to earn maximum DRCs. His spouse, also age 65, will earn benefits on his record and receive half of his PIA, but not half of any DRCs he earns.

However, since John has not yet filed for benefits (and his ability to file-and-suspend has been repealed by Congress) it isn’t feasible for him to delay the start of benefits past age 66. If he does, his spouse will permanently lose benefits, without earning DRCs.

When clients have large balances in retirement plans or IRAs, and they can start benefits at 66, DRCs may not be as valuable as advertised because of the tax impact. Currently, clients may qualify to have either 0% or 50% of their Social Security benefits included in taxable income, depending on other income.

However, once Required Minimum Distributions begin (after age 70 ½) from IRAs or qualified plans, taxable income may increase and the maximum 85% of benefits could be taxable.

Delaying benefits also means clients will need to pay Medicare premiums directly, rather than having them withheld from Social Security benefits.

Finally: How confident are clients in their ability to invest Social Security benefits between ages 66 and 70 and earn a rate of about 6-7%, after-tax? This is considered the break-even rate.

By starting benefits at 66 and investing at this rate, clients can expect to achieve about the same long-term financial results. They also will have money in hand, rather than leaving all benefits vulnerable to the future uncertainties of a Social Security system in need of repair.

Instant Insights /

Delayed Retirement Credits: The other side of the story

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