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.
FRA is 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 benefit 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 1963 (whose FRA is age 67) and who is becoming age 62 during 2025, 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 2025.
Waiting until the month a Social Security beneficiary reaches his or her FRA to start receiving one’s Social Security monthly retirement benefit not only results in a 100 percent payment of the monthly Social Security retirement benefit, but also the month at which time a working Social Security beneficiary no longer has to be concerned about the Social Security “earnings test”.
The Social Security Administration (SSA) has two “earnings test” that affect Social Security beneficiaries who are younger than their FRA, receiving their monthly retirement benefit, and who continue to work (they have “earned income” (salary/wage income, bonuses, commissions, vacation pay and net self-employment income). The SSA has two “earnings tests” that it conducts each year. During 2025, the first “earnings test” applies to all Social Security beneficiaries who are at least age 62 and who will not reach their FRA during 2025. That test works as follows: For every $2 the Social Security beneficiary earns above $23,400 during 2025, the SSA will reduce that beneficiary’s monthly by $1.
The second “earnings test” that the SSA uses during 2025 applies to Social Security beneficiaries who reach their FRA sometime during 2025. That “earning test” works during 2025 as follows: For every $3 the Social Security beneficiary earns above $62,160 between January 1,2025 and the last day of the month preceding the month the beneficiary becomes age 62 during 2025, the SSA will reduce that beneficiary’s monthly benefit by $1.
That is the bad news. Here is some good news: The month a Social Security beneficiary reaches his or her FRA, the beneficiary can earn (in salary, wages or net-self-employment income) any amount of money, and the beneficiary’s monthly retirement benefit will not be reduced. In addition, the SSA will recalculate the beneficiary’s monthly retirement benefit to give the beneficiary credit for the months that the beneficiary’s excess earnings caused benefits to be reduced or withheld.
Those federal employees and retirees who can defer the initial receipt of their monthly Social Security retirement benefit past their FRA will be able to increase their lifetime Social Security monthly income, 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 be eligible to receive a larger survivor benefit that includes “delayed retirement credits” (see below) earned by the higher earning spouse.
The increase in Social Security monthly retirement benefits by deferring receipt of benefits past one’s FRA are called delayed retirement credits (DRCs). DRCs are equal to 8 percent per year (2/3 of 1 percent per month) for every year (month) past FRA an individual defers receipt of his or her monthly Social Security retirement benefit. DRCs are applicable until the month an individual becomes 70. Starting 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 will 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 pretty much straight forward to understand, the “fine print” on how the SSA applies these DRCs to an individual’s Social Security record may surprise many individuals claiming their monthly benefit after they reach their 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 claiming his or her first monthly benefit are not due and payable until the earlier of: (1) January 1 of the year after the incremental months were earned; or (2) The month the claimant becomes age 70. The following example illustrates:
Example 1. Laura was born May 10, 1956. Laura’s FRA is age 66 years and 4 months, which occurred in September 2022. Laura deferred receipt of her monthly Social Security retirement benefit until June 2024 when she retired. She requested her first Social Security check to be for the month of June 2024 (to be received in July 2024). She is expecting her monthly benefit to include 21 months of DRCs for the period September 2022 through June 2024, 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 monthly benefit at age 66 years and 4 months. Laura’s monthly benefit at her FRA was $2,800. Laura expected her monthly benefit starting in July 2024 would therefore be $3,192, 14 percent more compared to her monthly benefit of $2,800 at her FRA.
Laura was surprised when her first Social Security check in August 2024 included only 15 months of the total of 21 months she earned in DRCs. That is because DRCs earned in the year one is receiving his or her first monthly Social Security benefit 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 70.
This means that Laura’s initial monthly benefit amount (received in August 2024) reflected the DRCs she earned starting the month after she reached her FRA (September 2022) and through December 2023 (October 2022 through December 2023, a total of 15 months). In January 2025, Laura’s monthly Social Security retirement benefit increased 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 2024) for the month she wanted her first Social Security monthly benefit. Laura’s monthly Social Security retirement benefit will subsequently increase each year by the annual Social Security COLA.
Taking a retroactive Social Security lump Sum payment or forgoing it?
Any individual eligible for a monthly Social Security retirement benefit and who files for the benefit after his or her FRA can request a retroactive Social Security lump sum payment . 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 currently needs 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 and Medicare Part D monthly premiums. The other disadvantage of taking the lump sum payment could be as much as 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 two-thirds of the 1 percent per month 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 at his FRA. In April 2023, with a DRCs of 6 months (September 2022 through March 2023) 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 Social Security retirement benefit starting in May 2023 is $2,500, his monthly benefit is $100 less than the $2,600 monthly benefit he would have received had he not taken the lump sum payment and used his 4 percent DRCs. Over 150 months his total benefit would be $100 per month times 150 months, or $15,000 less. If Jason lives 150 months (12 years and 6 months) past May 2023 (lives until November 2035) he would have made the wrong decision to take the lump sum Social Security payment. If he dies sometime before November 2035, then he would have made the right decision to take the lump sum Social Security 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.