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Fixing Social Security Mistakes

Last update on: Mar 16 2020

Most people start receiving Social Security benefits at the wrong time. Beginning Social Security retirement benefits early can cost you and your family tens of thousands of dollars of income compounded over your lifetimes.

A significant percentage begins receiving benefits when they first are eligible at age 62. Only a small percentage waits until age 70, when they are eligible for the maximum benefits. Most begin receiving benefits before full retirement age, which is 66 for those retiring today and soon will begin rising to 67.

As we’ve discussed, it generally pays to wait to receive benefits. The benefit levels are adjusted so people who live to life expectancy will receive the same lifetime benefits regard-less of when they begin benefits. But those adjustments are made based on 1986 life expectancy tables. People are living longer now on average, so for more people it makes sense to defer receiving benefits. Even if the life expectancy tables are valid, the half of the population that lives beyond life expectancy is better off waiting to start benefits.

Married couples are more likely to make mistakes, because there are opportunities for them to coordinate benefits and maximize lifetime income. As a general rule, the higher-earning spouse should wait as long as possible to begin benefits. Doing so maximizes the income available to whichever spouse survives the other. There are several options for the lower-earning spouse to consider. We discussed these in detail in past visits. These discussions are in the Cash Watch section of the Archive on the members’ section of the web site.

Fortunately, Social Security is not the one-time decision many believe it is. There are options for changing your benefits when your circumstances change or you believe you made a mistake the first time.

One strategy for changing your benefits isn’t as flexible as it used to be. A complete do-over is possible if you make the decision within the first 12 months of beginning benefits. You file Form 521 with Social Security and repay all benefits received to date. (Interest is not charged on the repayment.) Social Security calls this “withdrawal of benefits.”

Withdrawal gives you a fresh start, as though you never filed a claim to begin benefits. Then, you can wait until full retirement age, age 70, or whatever starting point you want. You’ll receive the higher benefit as though it were your first claim.

The decision could affect others who were drawing benefits on your earnings record, such as a spouse or dependent. They probably will be required to repay benefits and will stop receiving them when you do.

The second strategy is not as generous but is available to more people. You simply notify Social Security that you want your benefits suspended. The benefits will stop after about a one-month lag.

Two things happen when you suspend benefits. One event is that you stop receiving monthly benefit checks while the suspension is in effect. The other action is that you begin earning delayed retirement credits, increasing your future benefits by about 8% annually.

Retirement benefits can be suspended only at full retirement age or later. If you began receiving benefits before full retirement age, you can’t suspend them until age 66 or later.

Suppose you began receiving retirement benefits at age 62, and then at full retirement age (66) suspend them until age 70. Your benefits will increase about 32% during the delay. You’ll never reach the benefit you would have received had you initially waited to age 70 to receive benefits, but you’ll probably increase the benefits to your full retirement age benefit.

There are a couple of additional points. You can suspend only your own earned retirement benefits, not spousal benefits. So, if you are receiving spousal benefits early, suspending them isn’t an option.

Also, Medicare premiums generally are deducted from Social Security benefits. If you’re enrolled in Medicare and suspend Social Security benefits, you’ll have to begin paying the monthly Medicare premiums.

Now, let’s look at the opposite mistake: Someone who delayed or suspended retirement benefits and then decided he should have begun benefits earlier or needs the income. In these cases you qualify for a retroactive lump sum payment of the benefits you could have received earlier. The amount of the lump sum depends on your situation.

Suppose you delayed filing any claim for retirement benefits and are beyond full retirement age. Then, you decide you should have started to claim benefits. You can file to begin benefits and also can file for retroactive lump sum benefits. You’re entitled to a lump sum equal to up to six months of benefits that would have been paid for months when you were full retirement age or older. You can’t receive more than six months of retroactive benefits, and you can’t receive retroactive benefits for any benefits before your full retirement age.

Suppose instead that you filed for benefits and then suspended them. Now, you want to begin receiving benefits and you want the starting point to be the date you suspended the benefits. This isn’t an initial filing for retroactive benefits. It’s a reinstatement of benefits that you suspended. There’s no six-month limit on this lump sum claim. You can receive all the benefits you would have received back to full retirement age. (Remember you can’t suspend benefits until reaching full retirement age, so you can’t retroactively claim benefits that might have been paid before then.)

Social Security is not a one-time decision. There is some flexibility. You can’t completely return to your original options in all cases. But if your circumstances changed or you realized you didn’t make the optimum decision the first time, there are ways you can improve the situation.

RW March 2014.



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