Youâ€™ve already elected Social Security and now realize youâ€™ve made a mistake. Whether you didnâ€™t think about how your election would affect your spouse, or you were unaware of the options, youâ€™ve now changed your mind. What are your options?
Under the old rules, you could file early, then turn around and pay back all the benefits and re-file at a higher benefit. The Social Security Administration changed the provision in December 2010, limiting the pay-back option to only the first year after benefits are elected.
That doesnâ€™t mean you can no longer fix a mistake. There are still four options for changing or altering your benefits once youâ€™ve elected.
Option 1: Pay it Back
If you change your mind within the first 12 months of electing benefits, you can still file a form 521 to withdraw the application and pay back any benefits. If benefits were received by auxiliaries, such as a spouse or children, those benefits would also need to be repaid. Once benefits have been repaid, you are treated as though you never elected, which means you will not receive an actuarial reduction due to the original filing, and can file a restricted application for spousal benefits.
Option 2: Go Back to Work
If you are outside the 12-month window and decide you want to go back to work between the ages of 62 and Full Retirement Age (FRA), your benefits will be subject to an Earnings Test. The 2012 earnings test exempt amount is $14,640 ($38,880 in the year you turn FRA). Social Security will withhold $1 in benefits for every $2 of earnings in excess of that amount. This is not a tax!
Letâ€™s say you elected benefits at 62 and were receiving an $1,800 monthly benefit (75% of $2,400) and now you want to go back to work at 63 earning $90,000 per year. $90,000 – $14,640 is $75,360. Divide that by two and the earning penalty would be $37,680. Since that is greater than the total Social Security benefit of $21,600, you would not receive any Social Security for this period.
The reason we want to be very clear that the â€œearnings penaltyâ€ is not a tax is because Social Security would adjust the reduction on your benefits for each month in which you didnâ€™t receive a check due to the earnings test. If you actually received benefits for the 12 months you were 62, but then worked and did not receive any further benefits until age 66, SSA would go back to your record and adjust your benefit upwards. They will treat it as if you had originally elected at 65 instead of 62, so you would then begin receiving a check for $2,240 plus any Cost of Living Adjustments that had accrued.
Option 3: Voluntarily Suspend
There is another option for those who donâ€™t want to go back to work. Once you reach FRA, you can voluntarily suspend benefits. You simply need to call or visit a Social Security office and request a voluntary suspension. You can even call in advance of FRA with instructions to suspend at FRA.
Hereâ€™s where it gets interesting. See if you can follow the math here. By electing at age 62, you basically reduced your monthly benefit to 75% of what you would have received if you had elected at FRA. By suspending benefits at age 66, you will increase your monthly benefit by 8% per year until age 70, for a total of 32%. So, if you increase 75% by 32% you get 99% (.75 x 1.32 = .99). In other words, you can take Social Security from 62-66, suspend from 66-70 and still get 99% of the benefit you would have gotten had you simply waited until full retirement age.
This should not be viewed as a claiming strategy, only as a means for minimizing the damage of a mistake. There are several reasons one wouldnâ€™t want to elect at 62 with the intent of suspending at FRA. First, if you die between 62 and FRA, your widow would be permanently stuck with a substantially reduced benefit. Second, you would forfeit any future option of claiming a restricted spousal benefit, because once you file for your own benefit, even if it is in suspension, your spousal benefit is reduced as if you were actually receiving your benefit. If your own suspended benefit is higher than your spousal benefit, you will not receive a spousal benefit.
Option 4: Maximize Benefits for your Spouse who has not yet elected.
Social Security Timing (our optimization software) is geared to identify all the claiming ages possible for a given couple assuming that neither has elected yet. First, we generate all possible claiming ages under 9 different claiming strategies. Then we run them through an algorithm to identify the strategy that offers the highest lifetime benefit.
When we have a client who has already elected benefits and a spouse who has not yet elected benefits, we can identify the best of the remaining strategies for the spouse who has not yet elected. The software will automatically identify the strategy that presents the highest lifetime benefit given that constraintâ€”specifically including techniques 3 and 4 in this article.
Though it almost always pays for at least one member of a married couple to delay benefits, almost 75% of retirees elect Social Security between age 62 and FRA. Therefore, many people regret their decision or simply have a change of plans. Helping them navigate the different options for making a change is a great way for us to add value and make sure you are making the best decision.
You can learn more by reading my new book, Before Itâ€™s Too Late. You could also attend one of our upcoming Retirement & Estate Solutions Seminars held in Santa Rosa at the Flamingo Hotel. Watch for notices and/or call our office for dates and times.
Your personal financial consultant – Monty