Last week’s post introduced the “double dipping” strategy. It’s designed for married couples who are both eligible to receive retirement benefits, with one spouse retired and the other spouse still working. At Full Retirement Age (“FRA”)*, the retired spouse collects his/her benefit and the working spouse collects a “spousal benefit” equal to 50/% of the retired spouse’s benefit.
Although eligible to receive a retirement benefit based on his/her work record which could be significantly greater than his/her spousal benefit, the working spouse’s benefit will continue to grow by choosing instead to receive a spousal benefit. The growth could be as much as 32% if he/she works until age 70 compared to the benefit he/she would have received had he/she chosen instead to retire at FRA.
As stated at the conclusion of last week’s post, while a couple who receives a spousal benefit for the working spouse in addition to the retired spouse’s benefit is better off than a couple who is unaware of this strategy and simply receives the retired spouse’s benefit, the “double dipping” strategy isn’t without risk. Let’s take a look at an example to illustrate this.
Let’s assume a same-age married couple where both spouses are eligible to receive a monthly benefit of $2,475 beginning at age 66 and 2 months (FRA) based on each spouse’s respective work record. Per Exhibit 1, let’s further assume that Spouse A retires at FRA and Spouse B continues to work, collecting a spousal benefit equal to 50% of Spouse A’s benefit beginning at FRA. At age 70, Spouse B retires, discontinues his/her spousal benefit, and begins collecting a retirement benefit based on his/her work record. Finally, let’s assume that benefits increase by an annual inflation rate of 2%.
Per Exhibit 1, Spouse’s A’s annual benefit is $24,750 at age 66 and 2 months and Spouse B’s annual benefit is 50% of this amount, or $12,375. With assumed annual benefit increases of 2%, Spouse A’s annual benefit is $31,518 at age 69 and Spouse B’s annual benefit is 50% of this amount, or $15,759. At age 70 when Spouse B retires, discontinues his/her spousal benefit, and instead begins collecting a retirement benefit based on his/her work record, Spouse B’s annual benefit jumps to $43,737.
Had Spouse B not employed the “double dipping” strategy, and instead began collecting his/her benefit beginning at age 66 and 2 months, Spouse B’s benefit at age 70 would have been identical to Spouse A’s benefit – $32,148. This amount is $11,589 less than Spouse B’s benefit of $43,737 received. The increased benefit is attributable to postponing collecting his/her benefit based on his/her retirement record from age 66 and 2 months to age 70 due to annual delayed retirement credits of 8%, or a total of 32% (8% x 4 years). Furthermore, per Exhibit 1, Spouse B collected spousal benefits totaling $58,731 from age 66 and 2 months until age 70.
Although Spouse B receives a much greater benefit beginning at age 70 by employing the “double dipping” strategy, Spouse B has also forfeited the opportunity to collect double the benefit he/she would have received from age 66 and 2 months until age 70 had Spouse B simply applied for a benefit based on his/her work record instead of receiving a spousal benefit. This is illustrated in Exhibit 2.
Let’s jump to Exhibit 3 which shows a comparison of cumulative benefits assuming both spouses begin collecting a benefit based on each spouse’s respective work record (left three orange columns) vs. Spouse B initially collecting a spousal benefit which he/she discontinues at age 70 at which time he/she begins collecting a benefit based on his/her work record (right three yellow columns). Per Exhibit 3, it isn’t until age 74 that the “double dipping” strategy starts paying off. Prior to age 74, the couple’s cumulative projected benefits were greater when both spouses collected their retirement benefits based on their respective work records. Had Spouse B died before age 74, the couple would have been better off without the “double dipping” strategy. Assuming survival of Spouse B beyond age 73, the couple’s cumulative projected benefits using the “double dipping” strategy begin to exceed their benefits without use of this strategy.
What’s best for you? As with all Social Security strategies, you need to prepare an analysis using facts about your projected Social Security benefits and other assumptions that make sense to you. Furthermore, as will be discussed next week, taxation of Social Security benefits must also be considered before deciding upon a particular strategy.
* Full Retirement Age (“FRA”), otherwise known as normal retirement age, is the age at which one is entitled to receive 100% of his/her Social Security retirement benefit. It varies from age 65 to age 67 and is dependent upon the year of birth. The FRA for individuals born in 1937 or earlier is 65 while the FRA for those born in 1960 and later is 67.