An advisor called me with a question from a client. The client, "Jerry," called Social Security to explore his claiming options. Jerry reaches full retirement age (FRA) in January. He wanted information about when to claim since he will work until the end of June. He doesn't need the money but wonders if he should tap his benefit at FRA or wait to receive some delayed retirement credits (DRCs).
Confusing Information From Social Security
Jerry was confused after the conversation with the Social Security agent and relayed his conversation to his financial advisor. The agent told Jerry it didn't matter when he claimed —either in January or July. With either claiming date, Jerry's payments will be the same. How can that be?
While we often talk about DRCs as getting a boost of 8% per year up to age 70, the calculation is applied monthly. Waiting six months should permanently boost Jerry's monthly payment by 4%.
Why would the Social Security agent tell him he would get the exact same payment? Does Jerry need to claim a full year after FRA to "turn on DRCs?"
Nuances of Claiming After FRA
There are advantages to claiming at or after FRA. There are also technical and often misunderstood rules that apply. One of the lesser-known rules is when a client claims after FRA, Social Security will let them know they can get up to a six-month retroactive payment as a lump sum.
However, what the agents often miss is explaining the consequences of the lump sum: Your client's benefit amount gets recalculated back six months. And, the ongoing monthly payments will not include the full DRCs as expected.
In Jerry's case, the agent was technically correct. If he claims in January at his FRA, he would get $3,000 per month (as an example). If he claims in July, Jerry can choose a lump-sum retroactive payment and reset his ongoing monthly payments as if he had claimed in January. So, $3,000 per month.
What's the Harm in That Strategy?
There are several consequences to consider, including the three below, and Jerry's looking to his advisor to connect the dots.
For one, a potentially higher tax payment.
Social Security benefits are taxable for many clients. Because Jerry is working through June, his income will likely exceed the threshold for combined income of $44,000 for those married filing jointly.
