Fear that you pulled the trigger too soon on benefits? You may be able to reload and set yourself up for higher benefits later on.
A few years ago, a number of financial advisers began calling attention to a neat little feature in Social Security: the right for those who had claimed benefits early to effectively reverse their decision and escape from a lifetime of permanently reduced benefits. It wasn’t easy to do, of course. To undo a claim, you had to pay back every dime of benefits you had received from Social Security. But you didn’t owe any interest for the time you had used the money. And the potential reward was sweet. It could wipe out the 25% reduction in payments triggered by claiming benefits at age 62, and replace it with as much as 32% in delayed-retirement credits if you didn’t refile your claim until age 70. The increase between the age 62 and age 70 benefit: 76%. Although few retirees took advantage of this opportunity, in 2010 the Social Security Administration cracked down. It was widely reported that the “do-over” was done for. But that overstated the change in the rules.
In fact, beneficiaries still have a one-year window in which to change their minds about claiming benefits early. If you withdraw your application within 12 months, you can reset the clock by repaying the benefits received thus far and owe no interest for the time you had the money. Let’s say that like the first boomer to claim benefits, you started benefits as soon as possible, at age 62. Six months later, however, you regret the 25% lifetime reduction and want to change your mind retroactively. In that case, you could withdraw your application, pay back the six months’ worth of benefits and extinguish the 25% reduction. Your benefits would then be based on your age when you restart them, including the impact of any delayed-retirement credits if you postpone reapplying until after your full retirement age. In addition to limiting the do-over to the first 12 months after applying for benefits, the new rule also gives retirees just one bite at this apple: The maneuver is allowed only once in a lifetime.
If you’re already collecting benefits, there’s another way to effectively reset the clock. Once you reach full retirement age (between 66 and 67 depending on the year you were born), you can ask the Social Security Administration to suspend future benefits up to as late as age 70. No payback of the benefits is required, but neither do you erase the reduction imposed because you claimed early. But you do get the advantage of the 8%-a-year delayed-retirement credit for the time your payments are suspended. Let’s say you claim benefits at age 62 and decide at 66 that you can afford to forgo the payments in order to boost benefits later. If you suspend your benefits at age 66 and reclaim at age 70, you’ll enjoy a 32% boost over your age 62 benefits, thanks to the delayed-retirement credits. That would nearly offset the benefit cut triggered by filing originally at age 62.
If you are interested in either strategy, contact your local Social Security office and ask about “withdrawing your application” or “suspending your benefit.” Note that if you are enrolled in Medicare Part B when you stop receiving benefits, you will be billed for the premiums that are normally withheld from those payments.
Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.
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