Our previous post on Social Security, “Applying for Social Security: The Importance of Timing”, highlighted the importance of choosing an optimal strategy for maximizing your benefits. But what if you have already elected your Social Security benefits and now realize you did not employ the best strategy? Good news! You may still be able to reverse your decision. Whether you didn’t think how it would affect your spouse, or you were unaware of the different strategies that can maximize your benefit, or you simply changed your mind, you may still have options.
1. Repayment within one year
Under the old rules, if you elected your Social Security benefit at age 62, you would have received a reduced benefit for the duration of your life unless you employed the pay-back option at age 70: pay back all the collected benefits and refile for a higher benefit (as if you never elected at age 62). This was essentially an interest-free loan from Social Security. Realizing this substantial loss for the Social Security Administration, the SSA changed the provision in December 2010. The updated provision still allows for the “pay-back” option, but you can employ this option only in the first year after benefits are elected. Once you pay back the benefits, your case will be treated as if you had never elected, and you can file for spousal benefits.
2. Return to work
If you are outside this 12-month window and decide you want to go back to work between age 62 and full retirement age, you are subject to an Earnings Test. Under this test, the amount exempt is $14,640 ($38,880 in the year you reach full retirement age [FRA]). Social Security will withhold $1 in benefits for every $2 of earning in excess of this amount. Don’t fear; this is not a tax.
Example: You elected benefits at age 62 and are receiving $750 a month (75% of $1,000). At age 63, you decide to go back to work and start earning $100,000 per year.
$100,000 – $14,640 = $85,360. Divide that by two, and the earning penalty would be $42,680, resulting in income considerably greater than the benefit of $9,000 you would have received. (You will not receive any Social Security benefit for this period.)
Social Security will adjust the reduction of benefits for each month you did not actually receive a check due to this earnings test. Your benefit would be adjusted upward and treated as if you had elected the benefit at age 65 instead of 62.
3. Voluntary suspension
If you do not want to go back to work, here is a third option. Once you reach full retirement age, you can voluntarily suspend benefits by calling the Social Security office before you reach FRA.
In this scenario, if you elected at age 62, you will receive the reduced monthly benefit of 75% of what you would have received if you had elected FRA. By suspending benefits at age 66, your monthly benefit increases by 8% per year until age 70. That’s an increase of a whopping 32%!!
Get ready for some math: if you increase the 75% by 32%, you get 99% (.75 x 1.32 = .99). This means that even if you take reduced benefits from age 62-66 and suspend from 66-70, you still get 99% of the benefit you would have received if you had waited until FRA! That’s a win!
For various reasons, we do not encourage implementing this strategy to maximize your benefit, but only to fix a filing mistake. Why?
1. If you pass away between age 62 and FRA, your spouse is permanently stuck with a reduced benefit.
2. By taking this reduced benefit at age 62, you forfeit the option of restricted spousal benefit (strategy discussed in our previous Social Security blog post). Once you file for your own benefit, your spousal benefit is reduced as if you were actually receiving your own. If your own suspended benefit is higher than your spousal benefit, you will not receive a spousal benefit.
Don’t risk it! These techniques are a fix if you already filed for benefits early.
4. Maximization through your spouse, who has not yet elected
If you have already elected benefits without a complete analysis to clarify the strategy that provides the maximum benefit, and your spouse has not elected yet, there may still be a few strategies to time your spouse’s social security benefits to your advantage.
The spouse who has not yet elected may be able to file for a restricted application and collect spousal benefit as their benefit grows. This strategy may or may not be available depending on various factors.
Conclusion
The smartest approach for winding your way through the Social Security requirements is to consult with your Certified Financial Planner® before you or your spouse files for Social Security benefits. Have the planner provide a Social Security Analysis to clarify the strategy that provides the maximum lifetime benefit. However, if you have already elected without taking advantage of these strategies, you may still have a chance for a fix. Call your CFP® today, and maximize your benefits.