Social Security and delayed retirement credits

[question everything]

From the WSJ Encore column

Q. My question is about Social Security and delayed retirement credits. I thought my benefit would increase each month that I wait to file for Social Security beyond my full retirement age. But when I claimed benefits in August, at age 68½, my check didn’t include the delayed retirement credits for this year. Did someone at Social Security make a mistake?

A. There’s no mistake. This is yet another quirk in the Social Security program. But hang in there—you should see your full credits soon.

Delayed retirement credits are, in effect, a bonus that the Social Security Administration pays you if you delay claiming benefits beyond your full retirement age (the age when a person can first collect an unreduced benefit). For each month you delay, your benefit increases two-thirds of 1%. Example: If you’re eligible for a benefit of $2,000 a month at a full retirement age of 66, your payout will increase $13.33 for each month (until age 70) that you wait to file for Social Security. But…here’s the wrinkle: When you eventually claim your benefit, you won’t see all of these credits in your monthly payout—at least not at first. Rather, you receive the credits in two stages. (And bear with me.)

First, you receive all of the credits that you earned through December of the year prior to the year in which you first file for Social Security. Then, any credits that you earned during the year you first claim benefits are applied the following January to your monthly payout.

Let’s use your situation. Let’s say you were eligible for a monthly benefit of $2,000 in February 2018, the month you turned 66. If, as you note, you first claimed Social Security in August 2020, your first payout would have included all the delayed retirement credits you earned through and including December 2019. That would be 23 months (February 2018 through December 2019) and $13.33 for each month, or $306.59. Which means that your first payout after filing for benefits would have been $2,306.59. (To keep things simple, I’m not including cost-of-living adjustments.)

Then…next month, January 2021, the Social Security Administration would apply the delayed retirement credits you earned in 2020: seven months (January through July) and $13.33 for each month, or $93.31. Which means that your monthly payout would increase to $2,399.90. And that figure would reflect—finally—all of your delayed retirement credits.

Note: These rules do not apply, thankfully, to people who first claim Social Security at age 70. Such individuals receive all their delayed retirement credits immediately, in their first benefit check. They aren’t made to wait until the following January.

https://www.wsj.com/articles/forced-to-retire-it-might-not-be-as-bad-as-you-fear-11607007600 (subscription)

[Pobeka]

1. When I looked at my increases for delaying, the increases did not uniformly rise.

I think I saw a big jump at age 69, but I can't remember for sure what age it was where the jump happened.

The same was true for my SO.

You have to run the SS calculator for every age you can start taking benefits to know the increase you get by delaying year by year.

It was definitely not a constant %rise for each year delayed in my case, and I don't have any special conditions.

So, in my hypothetical of a big jump at age 69, if I was thinking about holding off to age 68, it would really make sense to wait the extra year for the big jump, or just start it at age 67.

[Jirel]

2. This discussion often comes from a false premise.

You see a lot of poorly qualified or unqualified advisors (especially the right-wingers looking for a get rich quick scheme) suggesting that there is merit to waiting on your Social Security retirement to “maximize” monthly benefits. This is mathematical horse hockey. Let’s look at the practical implications.

When you do the math, there is really no such thing as a “full” retirement age. The reality is that you can take retirement any time between 62 (the earliest you can claim) and 70 (max benefit). The earlier you start, the less monthly income you will get. But the bitter pill is that whatever your MONTHLY benefit is, it is calculated that by your expected age at death, you will get the same total amount. From an actuarial point of view, you gain absolutely nothing by starting benefits after the mythical “full” retirement age.

Oh, you might “cheat” the actuaries by a number of years by stubbornly surviving longer, and come out a bit ahead. But there are real-life negative consequences to this decision to “maximize” monthly income.

You don’t know whether you’ll die in a car crash at age 63, of illness at “full” retirement age, or of old age at 103. That means that by waiting to “maximize,” you might never collect a penny. $0 is a pretty crappy deal.

On the flip side, being less “frugal” and starting “early,” regardless of your finances, may make much more sense for several reasons:
1. It may make it possible to live better, worry less, afford better insurance, work less, have better food and medical care - all manner of things that not only improve quality of life, but tend to extend it as well.
2. If you don’t need the money, that’s ok. In your hands, the funds can be invested. The returns may be better than the conservative increase in Social Security benefits.
3. In a time of need, the money will be immediately available.

[question everything]

4. I received a letter from the SS when I reached 66

Spouse and I went to the local office. Only in the car I read the letter to find a suggestion to make an appointment. Oops. We met with a wonderful agent who performed break even analysis under different scenarios and we decided to start then. This way we could wait to 70 1/2 to start withdrawing from one IRA.

Several years later we suggested to a family member to request a similar break eve analysis and she, too, started taking benefits instead of waiting to reach 70. Having these benefits allowed her, a year later, to quit her job at a very low pay that she hated.

[PoindexterOglethorpe]

3. I was glad to read your final paragraph.

I started collecting at age 70, and did not see any additional amount as described in the earlier part of the article. Now I know why.

I do get tired of seeing people say you should claim as early as possible, you never know when you'll die, and a bird in the hand, and all that crap. It is really nice having the larger monthly income. The people I personally know who started collecting at age 62 wound up regretting it, because of the permanently reduced income. It's all well and good for those who have a generous pension or huge savings, but most people who collect early do so out of dire necessity. Or sometimes what they think is dire necessity, when in reality they could have easily worked two or three or more years. Again, I'm thinking of people I personally know.

Plus, the COLA, as miserable as it can be, is a percentage increase over what you are already collecting. Which means that those who start collecting early and thus get a minimum amount, fall behind year after year.

The book Get What's Yours by Laurence Kotlikoff, Paul Solman, and Philip Moeller is enormously helpful. I read the first version when it came out and bought the updated one a couple of years later. That was how I learned I could collect against my ex-husband's account once I turned 66 (my full retirement age) and then my on my own account when I turned 70. Hooray for me.

And "full retirement age" is a meaningful concept, if for no other reason than that age is the one at which you can, if you wish, collect SS and still work, without your SS payout being reduced. Hooray for that!