Quirks of Waiting Until Full Retirement Age to Claim Social Security Benefits

Personal Finance April 20, 2023April 19, 2023 News Team

For most federal employees and retirees, waiting until they reach their full retirement age (FRA) to start receiving their Social Security retirement benefits is encouraged.

The FRA is age 65 to 67, depending on what year an individual was born as shown in the following table for individuals born after 1942:

FRA for Individuals Born After 1942

This column presents some of the quirks that federal employees and retirees should be aware of with respect to waiting until they reach FRA to start receiving their monthly Social Security benefits.

Individuals who are Social Security “fully insured” (have accumulated during their working years at least 40 credits of Social Security) and therefore eligible for Social Security retirement benefits) can elect to start receiving their Social Security retirement benefits as early as when they become age 62.

But they are encouraged not to draw their benefits much before they reach their FRA unless:

(1) They have a pressing need for cash flow; or

(2) They are in failing health and do not expect to live past age 78.

Starting to receive Social Security benefits before FRA will result in a permanent reduction of monthly benefits. For example, an individual born in 1961 (whose FRA is age 67) and who is becoming age 62 during 2023, will have a permanent reduction of 30 percent in their monthly Social Security benefit if they elect to start receiving their Social Security monthly benefit the month after they become age 62 during 2023.

Waiting until FRA to start receiving one’s Social Security monthly retirement benefit not only results in a 100 percent payout of the monthly benefit, but also FRA is the age at which exceeding a cap on earned income (salary, wages, or net self-employment income) is no longer a concern that can result in withheld Social Security monthly benefits. In other words, the Social Security earnings test no longer applies when an individual reaches his or her FRA.

Those federal employees and retirees who can defer the initial receipt of their monthly Social Security retirement benefit past their FRA stand to increase their monthly income lifelong, thereby reducing the risk of a cash flow shortage during an extended retirement that could last until they are in their 90s.

For a married employee or retiree, deferring receipt of Social Security benefits can also protect a surviving spouse in many cases. For example, when two spouses have uneven work histories and one spouse’s monthly benefit at his or her FRA is much lower than the other spouse’s monthly benefit at his or her FRA.

This is because that upon the death of the higher earner spouse, the lower earner spouse will get a larger survivor benefit that includes “delayed retirement credits” (see below) earned by the higher earning spouse.

The increases in Social Security monthly retirement benefits by deferring receipt of benefits past one’s FRA are called “delayed retirement credits” (DRCs) and are equal to 8 percent per year (2/3 of 1 percent per month) for every year (month) an individual defers receipt.

DRCs are applicable until the month an individual becomes age 70. At age 70, DRCs no longer apply. In fact, once an individual becomes age 70, he or she should apply for his or her monthly Social Security benefit.

For example, if an individual’s FRA is age 67 and the individual defers receipt of Social Security monthly retirement benefits until age 68, the monthly benefit will be permanently increased 8 percent more compared to what it would have been had the individual started to receive the benefit at age 67.

At age 69, the benefit will be 16 percent more, and finally at age 70 the monthly benefit would be 24 percent more. Note that the increases apply to spousal survivor benefit as well.

While the incremental increases in monthly Social Security benefits are straight forward to understand, the “fine print” on how the Social Security Administration (SSA) applies these DRCs to an individual’s benefit may surprise an individual who claims his or her Social Security monthly benefit after FRA.

The reason is that an individual who defers claiming his or her monthly benefit beyond FRA is entitled to the DRCs earned through the end of the year before the claim is made. Any DRCs earned in the year of claim are not due and payable until the following January. The following example illustrates:

Example 1. Laura was born July 10, 1955. Laura’s FRA is age 66 years and 2 months, which occurred in September 2021. Laura defers her monthly Social Security retirement benefit until June 2023 when she retires. She wants her first Social Security check for the month of June 2023 (to be received on the second Wednesday of July 2023). She is expecting her monthly benefit to include 21 months of DRCs (October 2021 through June 2023) which would result in an increase of 21 months times 2/3 of 1 percent per month, or a 14 percent increase, in her monthly benefit compared to Laura receiving her first Social Security monthly benefit at age 66 years and 2 months. Laura’s monthly benefit starting in July 2023 would therefore be $3,192, 14 percent more compared to her monthly benefit of $2,800 at her FRA.

Laura will be surprised when her first Social Security check in August 2023 will include only 15 months of the total 21 months she has earned in DRCs. That is because DRCs are payable at the earlier of: (1) January 1st of the year after the incremental months were earned; or (2) the month the claimant becomes age 70.

This means that Laura’s initial monthly benefit amount will reflect the DRCs she earned starting the month after she reached her FRA (September 2021) and through December 2022 (October 2021 through December 2022, a total of 15 months).

In January 2024, Laura’s monthly Social Security retirement benefit will increase by 6 months times 2/3 of 1 percent per month, or 4 percent, to reflect the DRCs she earned by waiting 6 months (January through June 2023) during 2023 to start receiving her Social Security monthly benefit. Laura’s monthly Social Security retirement benefit will subsequently increase each year by any Social Security COLAs.

Taking a Social Security Lump Sum Payment or Forgoing It

Any individual eligible for a Social Security monthly benefit and who files for the benefit at least 6 months after his or her FRA can request 6 months of retroactive payments in a lump sum. The question is: Is the lump sum payment a good idea and are there any drawbacks?

The lump sum payment may be an appropriate choice for a retiree who may need additional funds for cash flow. Perhaps they have sudden or unexpected expenses. For a federal retiree, taking the lump sum payment may be better compared to withdrawing funds from a tax-deferred account (such as the traditional TSP or a traditional IRA) or a tax-free account (such as the Roth TSP or a Roth IRA).

The disadvantage of the lump sum payment is that the extra inflow of cash in the year it is received may result in additional federal and state income taxes. The lump sum payment may also result in an increase in the following year of income-based Medicare Part B monthly premiums.

The other disadvantage of taking the lump sum payment will be a 4 percent reduction in DRCs for the rest of the retiree’s life. This is because by electing the lump sum payment an individual will forgo the 4 percent DRC increase he or she earned. The lump sum payment therefore makes sense if the individual does not expect to live that long after receiving the lump sum payment, as illustrated in the following example:

Example 2. Jason reached his FRA of age 66 years and 4 months in September 2022. He elected not to receive his monthly benefit of $2,500. In April 2023, with a DRCs of 6 months (September through March) times 2/3 one percent, or 4 percent of $2,500 or $100, his monthly benefit increases to $2,600. Jason elects in April 2023 to take the lump sum payment of 6 months times $2,500 per month or $15,000. Starting in May 2023, Jason receives $2,500 per month (not $2,600 per month) because he has permanently lost the 4 percent DRC he initially earned. Did Jason make the right choice?

Since Jason’s monthly benefit is $2,500 and not $2,600, his monthly benefit is $100 less. Over 150 months his total benefit would be $100 per month times 15 months, or $15,000 less. If Jason lives 15 months past May 2023 (lives at least until August 2024) he would have made the wrong decision to take the lump sum.

If he dies before August 2024, he would have made the right decision to take the lump sum payment. That is why an individual’s health status is a key factor in making the decision whether or not to take the lump sum payment and forgoing the increased Social Security monthly benefit resulting from the DRCs.

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