Friends and fellow investors,
I'm analyzing the benefit of paying my spouse in our business for social security benefits. For this, I have been trying to better understand how social security benefits are calculated. I've looked at the inflection points of earnings, which I understand to be 90% of the first $885/month, then 32% of the earnings beyond that to $5,336, and 15% of the amount above $5,336.
I'm purposefully ignoring how inflation is factored into the formula, as I'm trying to isolate the value of paying my spouse in increasing her social security benefits.
Based upon these inflection points, I thought we would get more benefit from making sure my wife earned at lest $885/month for at least 35 years (as only highest 35 years of earnings are counted for social security benefits), or $10,620/year, as I thought each year was treated as an independent event. However, when I look at how benefits are calculated, it seems that each year of earnings (subject to maximum of $127,200 currently) are added to get a total amount of earnings, which is then divided by 420 (35 years of 12 months). Given this formula, it seems I was wrong about each year being an independent event.
As each year is not an independent event, for me it makes more sense to think of the lifetime earnings and the inflection points associated with those lifetime earnings. Now I see the inflection points as 90% of the first $371,700 of earnings ($885/month * 420 months), then 32% of the earnings beyond that to $2,241,120, and 15% of the amount beyond $2,241,120.
Assuming my wife already has $371,700 of lifetime earnings, all her future earnings are only only providing about 1/3 of the benefit (32% v. 90%) relative to her previous earnings, right?
Feedback on my analysis is appreciated, including pointing to resources that may already discuss this, which my research failed to uncover.
Thank you!
Thomas
I'm analyzing the benefit of paying my spouse in our business for social security benefits. For this, I have been trying to better understand how social security benefits are calculated. I've looked at the inflection points of earnings, which I understand to be 90% of the first $885/month, then 32% of the earnings beyond that to $5,336, and 15% of the amount above $5,336.
I'm purposefully ignoring how inflation is factored into the formula, as I'm trying to isolate the value of paying my spouse in increasing her social security benefits.
Based upon these inflection points, I thought we would get more benefit from making sure my wife earned at lest $885/month for at least 35 years (as only highest 35 years of earnings are counted for social security benefits), or $10,620/year, as I thought each year was treated as an independent event. However, when I look at how benefits are calculated, it seems that each year of earnings (subject to maximum of $127,200 currently) are added to get a total amount of earnings, which is then divided by 420 (35 years of 12 months). Given this formula, it seems I was wrong about each year being an independent event.
As each year is not an independent event, for me it makes more sense to think of the lifetime earnings and the inflection points associated with those lifetime earnings. Now I see the inflection points as 90% of the first $371,700 of earnings ($885/month * 420 months), then 32% of the earnings beyond that to $2,241,120, and 15% of the amount beyond $2,241,120.
Assuming my wife already has $371,700 of lifetime earnings, all her future earnings are only only providing about 1/3 of the benefit (32% v. 90%) relative to her previous earnings, right?
Feedback on my analysis is appreciated, including pointing to resources that may already discuss this, which my research failed to uncover.
Thank you!
Thomas
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