Mary Beth Franklin: Clients get two-fer when they postpone Social Security

I received a great question from a reader in Wheeling, Ill., the other day. Tom turned 66 in November 2011 and filed a restricted claim to limit his Social Security benefits to spousal benefits only when his wife began collecting her reduced benefits at age 62 last spring. That action allows him to defer collecting his own retirement benefits until they are worth the maximum amount at age 70.

Using this savvy claiming strategy, Tom can collect half of his wife’s full retirement benefit now (even though she collected reduced benefits because she claimed four years early). Meanwhile, his own retirement benefit will continue to grow by 8% per year until he starts collecting benefits at age 70.

Not only will his benefit be worth 132% of what it would have been at his full retirement age of 66 that he reached in November 2011, but he’ll lock in the largest possible survivor benefit to protect his wife should he die first.

But now Tom wonders whether he’s really getting the full benefit of the 8% annual delayed retirement credit (DRC), or whether he should subtract the 1.7% cost of living adjustment (COLA) that would have been applied to his larger retirement benefit amount this year had he started collecting benefits at his full retirement age. (He said that he realizes that the 1.7% COLA for 2013 is being applied to his smaller spousal benefit).

“Am I forfeiting COLAs on the benefits I have deferred while I am earning DRCs of 8% per year, and therefore actually realizing a lesser than 8% annual increase by waiting?” Tom asked via e-mail.

Good news, Tom! You benefit from both the annual COLAs and the delayed retirement credits, making postponing retirement benefits a really great deal.

COLAs are applied to your primary insurance amount (PIA) beginning when you first become eligible for Social Security benefits at age 62 until you claim benefits, said Social Security spokesperson Kia Green Anderson. Your PIA is the amount you would receive if you elected to begin receiving benefits at you normal retirement age.

Delayed retirement credits, worth 8% -per-year, are applied to the PIA for any month a person delays retirement benefits beginning at full retirement age until age 70. DRC increases are effective in January of the following year.

“When your reader retires at age 70, we will apply all applicable COLAs and his PIA at age 70 will incur the full 48 months of DRCs,” Ms. Anderson said. The COLA for 2012, when DRCs would first be applied, was 3.6%. For 2013, it’s 1.7%.