Staggering retirement and Social Security benefit dates creates complications

Q: I turned 64 in November and I am thinking of calling it quits in one more year, when I turn 65. I will probably still work part time but not earn enough money to affect my Social Security benefit. My understanding from reading my Social Security Administration (SSA) statement is that my benefits would be substantially increased if I waited one more year to retire at 66, by about $300. My question: If I retire at 65 but don't start collecting until I'm 66, does that allow me to collect that extra benefit or do I still have to work until 66 to get that extra money?

Secondly, the SSA website shows my benefit to be about $2,600 if I retire at 66. But if I plug in 65, then 66 into a website calculator, it's about $200 lower for 66? Why is that? – Jim Walsh, Michigan

A: So, let’s start by using $2,600 as your primary insurance amount (PIA). $2,600. Your PIA is your monthly benefit amount if you begin benefits at your full retirement age (FRA) of 66 in November 2018, said Dr. William Reichenstein, a professor at Baylor University and a principal with Social Security Solutions.

“You may quit work now and begin benefits later,” says Reichenstein. “But these are separate decisions.”

To get a bit technical, the reduction for beginning benefits up to 36 months before FRA is 5/9% of PIA per month, says Reichenstein. “So, if you begin benefits in January 2017 – you would lose all benefits for 2016 due to earnings test if you apply for benefits now – then you would receive 88 8/9% of $2,600 or about $2,311 per month,” he says. “If you begin benefits in November 2017 at 65, you would get 93 1/3% of $2,600 or about $2,426. If you wait until FRA in November 2018, you will get $2,600.”

Furthermore, Reichenstein says you would receive 2/3% of PIA more per month for each month you delay benefits beyond FRA up to age 70.  “The 2/3% of PIA more per month is 8% more per year,” he says. Thus if you delay the start of benefits until 68 or 70, your benefits would be $3,016 or $3,432 per month with all benefit amounts before COLAs.”

And if you are the higher-earning spouse and you predecease your spouse then, says Reichenstein, your spouse would continue to receive your $3,432 in survivor benefits for the rest of his or her life.

“Bottom line: By delaying your benefits from January 2017 up to November 2020, your monthly benefit amount will increase,” says Reichenstein.

And if you are the higher earner then this higher amount will last until the second spouse dies. “If you are the higher earner then to maximize your joint lifetime benefit, you should consider how long benefits based on your record will likely last,” says Reichenstein. “If they are expected to last until you would be 86, if still alive, then you should consider delaying your benefits until 70 to maximize your expected joint lifetime benefits.”

Of note, due to recent rule changes, Reichenstein says if your spouse was born after Jan. 1, 1954 then she cannot receive spousal benefits until you begin your benefits. “If her PIA is less than $1,300 – half of your PIA – then, depending on your relative ages and life expectancies, it may pay for you to begin your benefits earlier so she can begin spousal benefits,” he says.

Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch. Got questions about money? Email rpowell@allthingsretirement.com.