Will My Social Security Benefit Be Lower If I Stop Work At 63 But Delay Filling Until 67?

Today’s column addresses questions about potential effects of retiring from work four years before filing for a retirement benefit, filing for retirement benefits before spousal benefits and transferring conserved benefits to a capable beneficiary. Larry Kotlikoff is a Professor of Economics at Boston University and the founder and president of Economic Security Planning, Inc, which markets Maximize My Social Security and MaxiFi Planner.

See more Ask Larry answers here.

Have Social Security questions of your own you’d like answered? Ask Larry about Social Security here.

Will My Social Security Benefit Be Lower If I Stop Work At 63 But Delay Filling Until 67?

HI Larry, I’m about to turn 63 and will stop earning income when I do. However, I don’t plan to draw my retirement benefit until 67 or possibly later. I’ve heard from some people that this will mean my benefit will decrease but other sources seem to say not working before filing will not decrease my benefit. Can you explain which it is? Thanks, Gabe

Hi Gabe, I’m assuming that you were born in 1960 or later, making your full retirement age (FRA) 67. If you stop working at 63, your full retirement age rate, or primary insurance amount (PIA), won’t increase or decrease after that except for cost of living increases (COLA). A person’s PIA is calculated based on an average of their highest 35 years of Social Security covered wage-indexed earnings.

So if you stop working at 63, your PIA would be based on your highest 35 years of wage indexed earnings up to the time of your retirement.

If you were to stop working and start drawing your Social Security retirement benefits prior to FRA your benefit rate would be reduced for age. That percentage reduction is applied to your PIA and amounts to 5/9ths of 1% for up to the first 36 months of reduction, and 5/12ths of 1% for each reduction month in excess of 36 months.

But if you delay filing until 67, your benefit would not be decreased. They also however would not increase as they might otherwise have due to continued earnings. If you had earnings between 63 and 67 high enough to knock earlier lower earning years out of your 35 computation years, this would have increased your benefit, if perhaps not by a lot.

SSA’s estimates are based on you continuing to earn at your last reported income until you file. So if the income SSA assumes you would have would have been enough to increase your benefit in this way but you do not actually have that income, your actual benefit will not be as high as SSA estimates it would. Best, Larry

If My Wife Files For Her Benefits At FRA Will It Impact Her Future Spousal Benefits?

Hi Larry, My wife will be 65 this year, while I will be 60. If she applies for her Social Security retirement benefit at her 66 and 10 mnths FRA at ~$800, will it impact her later spousal benefits when I reach 67 FRA and file for my $3,400 retirement benefit? Will SSA automatically switch her to spousal benefits or will she have to apply? Thanks, Leonard

Hi Leonard, Filing for her own benefits at full retirement age (FRA) will not adversely affect the spousal benefit your wife will be able to receive when you start drawing your retirement benefits.

When a person is drawing their retirement benefits and later becomes eligible for spousal benefits, their unreduced spousal rate is calculated by subtracting their own primary insurance amount (PIA) from 50% of their spouse’s PIA. A person’s PIA is equal to their Social Security retirement benefit rate if they start drawing their benefits at full retirement age (FRA).

So if your wife starts drawing her retirement benefits at FRA, when you file for your retirement benefits, she’ll become eligible for an additional excess spousal benefit equal to the difference in her own rate and 50% of your PIA.

That will bring her combined benefit rate up to a full 50% of your PIA, which is the most that she could receive as a spouse while you’re living. And by the way, if your wife was born in 1955, her FRA would be age 66 and two months, not 66 and 10 months.

Filing for her own benefits at FRA and then filing for excess spousal benefits when you apply certainly sounds like your wife’s best option, but you may want to consider using my company’s software — Maximize My Social Security or MaxiFi Planner — to fully analyze the options available to you and your wife in order to determine your best strategy for maximizing your benefits. Social Security calculators provided by other companies or non-profits may provide proper suggestions if they were built with extreme care. Best, Larry

What Should We Do With My Daughter’s Conserved Benefits?

Hi Larry, I have deposited some Social Security Disability benefit funds into a MOST 529 Education Plan for my daughter. She turns 18 tomorrow and we received the same conserved funds to be returned back to SSA letter mentioned in other questions.

This education plan is only to be withdrawn for educational purposes and we have to pay the school directly or there is a huge penalty for withdrawing for non-educational items. Should this account be transferred directly into my daughter’s name as payee and beneficiary to stop SSA from wanting those funds back? Her savings account has her name and my name as co-owner.

Should I remove myself as co-owner? Should I send a letter to SSA explaining her funds are in her own account and that she will be living at home for her college years? Thanks, Marla

Hi Marla. That’s a tough question to answer. If I were you I’d start out by discussing the situation with Social Security (SSA).

Their operations manual says that SSA may permit a former payee to transfer conserved funds directly to a capable beneficiary rather than returning them to SSA if it serves the best interest of the beneficiary, and goes on to say that allowing such transfers are decided on a case-by-case basis.

Your description of your circumstances certainly seems to indicate that a direct transfer would be in your daughter’s best interest, and hopefully Social Security would agree. Best, Larry

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