Do-Over Options for Social Security Claiming Decisions
Presented by erik dullenkopf, cfp
If you claim your social security benefits and then realize doing so might not have been in your best interest, you may have an opportunity for a do-over. There are three strategies that may apply, depending on your individual circumstances. Let’s take a look at each one.
1) Withdrawing an Application for Benefits
You may have claimed benefits—perhaps early, before your Full Retirement Age (FRA)—and now you have changed your mind. You may have realized you would rather not have reduced monthly benefits (by claiming early, your benefit can be reduced by as much as 30 percent). Or maybe you didn’t have all the information you needed to factor into your decision, your personal circumstances have changed, or you have a short-term cash need. Whatever your reasons may be, you can withdraw your application as long as it is done within 12 months of first claiming benefits. To do so, submit Form SSA-521 Request for Withdrawal of Application.
You only get one withdrawal opportunity per lifetime. But when you do ultimately claim your benefits, you will have erased the reduction for claiming early and get whatever you are due at the age you claim. So, if you wait to reclaim until age 70, you will get the benefit of any delayed retirement credits that accumulate after your FRA.
The Social Security Administration will notify you of whether your request has been approved and how much you are required to pay back. You do need to pay back all benefits you have received, including any amounts your spouse or children received through spousal or dependent benefits, as well as amounts withheld from your social security check, such as Medicare premiums. The benefits must be paid in one lump sum; they cannot be paid back over time. This may present problems, especially if it involves a large sum of money. For example, if you claimed early and were receiving $2,500 per month and changed your mind after one year, you would need to pay back $30,000 all at once.
You do have up to 60 days to cancel an approved withdrawal. In addition, you can choose to withdraw your Medicare coverage (Medicare eligibility starts at age 65). Keep in mind that if you do withdraw your social security benefits, you will not be automatically enrolled in Medicare when you turn 65. And if you are already enrolled in Medicare, you can choose to continue your Medicare coverage; however, you will have to pay your Medicare Part B and D premiums directly, as you are no longer able to have those premiums deducted from your monthly social security check.
Remember that you can withdraw your application for benefits even if you have already reached FRA. To take advantage of the other do-over options, however, you must have at least reached your FRA.
2) Suspending Benefits
You may suspend your social security retirement benefit (but not family or survivor benefits) once you have reached your FRA. Unlike when withdrawing your benefit, you won’t have to pay anything back, but your monthly benefit will stop as well as those for any dependent family members, except for a divorced spouse. While your benefits are suspended, you will earn delayed retirement credits of 8 percent per year up until age 70, resulting in a higher benefit payment. Your benefit will be suspended beginning the month after you make your request. Your benefits would then start up again automatically in the month you turn 70, unless you want your payment to start sooner. As with withdrawn benefits, your Medicare Part B premiums cannot be deducted from your suspended benefits, so be sure to make alternative arrangements for paying the premiums, such as automatically paying from a financial institution account.
To illustrate how suspended benefits work, let’s consider an example. If you originally claimed your retirement benefit early at age 62 and your FRA was 67, you would receive 70 percent of your FRA benefit. If you then suspend your benefit at 67, your monthly benefit would stop and you would earn delayed retirement credits up to age 70, when your benefits would resume. At that point, your benefit would be worth 86.8 percent of your FRA benefit (70 percent [representing your permanent reduction for claiming early] multiplied by 1.24 [to account for three years of delayed retirement credits]).
This strategy can be especially beneficial for married couples. If the spouse who suspended benefits dies first, the surviving spouse would receive the larger of their own benefit and the deceased spouse’s benefit (which would include delayed retirement credits accumulated after suspension of benefits).
3) Retroactive Benefits
Once you have reached your FRA, you may be able to collect up to six months of social security benefits retroactively. Retroactive benefits are paid in a lump sum, but you will lose any delayed retirement credits you may have earned for those six months. The six months of retroactive payments would permanently reduce your social security payment by a total of 4 percent for a six-month retroactive payment.
Keep in mind that if you claim your benefits three months after your FRA, you will only be entitled to retroactive benefits for three months. Those who claim social security benefits before their FRA are not eligible to receive retroactive benefits.
Retroactive benefits may be especially attractive to those entitled to a spousal or survivor benefit but who waited to claim the benefit until after their FRA. Both benefits are worth their maximum amount at FRA; they do not get the benefit of delayed retirement credits.
Because retroactive benefits provide an immediate lump sum, this strategy could be used to take care of a short-term cash need. In addition, retroactive benefits can be used in conjunction with the previous strategy of suspending benefits, allowing you to earn delayed retirement credits going forward to increase your monthly benefit.
Making the Most of Social Security Benefits
The three options discussed above allow you to rethink your original claiming strategy and potentially reap a larger overall social security benefit. We can help you determine if your claiming strategy makes sense given your circumstances and, if not, whether any of these three options could help optimize your situation.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
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Screaming Eagle Wealth Management is located at 305 S. Kalorama Street, Suite F, Ventura, CA 93001 and can be reached at 805.643.7700. Erik P. Dullenkopf, CFP® (CA Insurance license #0F97513) is a Registered Representative and Investment Adviser Representative with/and offers securities and advisory services through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance Agency or Screaming Eagle Wealth Management.