Because of the effects of the COVID-19 pandemic, many people are reevaluating their Social Security claiming decisions. If you’re among them, be sure you use the Social Security rules to make your revised strategy maximize lifetime benefits as much as possible. The economic downturn caused many people to lose their jobs, and business owners saw revenues plunge.
Others experienced sharp declines in their portfolio values or interest and dividend income. People age 62 or older can claim Social Security retirement benefits and obtain an immediate cash flow boost. Lifetime Social Security benefits are maximized for many people when the claim for benefits is delayed as close to age 70 as possible. But sometimes the short-term need for cash flow over-rides the best long-term strategy.
If you’re feeling a need to claim benefits now to generate income, keep in mind a few key Social Security rules. These rules can help you increase lifetime Social Security income even when you aren’t making the optimum long-term decision.
Remember that you can change the decision later. Social Security is not always a once-in-a-lifetime decision. Most people have two opportunities to change their Social Security retirement benefit decisions.Within the first 12 months of when you claim Social Security retirement benefits, you can obtain a fresh start. This is a great solution for someone whose income declined temporarily in 2020 because of unemployment or a business downturn.
You can claim Social Security benefits now and cancel them after business improves or you are re-employed.The strategy is to withdraw your application for benefits within 12 months after claiming benefits. Then, you’ll be treated as though you never claimed benefits. When you claim benefits lat-er, you’ll receive the delayed retirement credits that increase benefits based on your age the second time you claim them.There are two keys to this strategy.
The first key is you must withdraw the application for benefits within 12 months of when you filed it. Know what the deadline is when you file to claim benefits, so you’ll be able to act in time. Miss the 12-month deadline and you lose the ability to withdraw the application. The second key is you must repay all the benefits you were paid. You won’t owe interest or a penalty. But you must repay the gross amount of benefits paid in order to withdraw the application.The second opportunity to modify the decision to claim benefits is available any time after reaching full retirement age (FRA).
After reaching FRA, you can ask that the benefits be suspended. Social Security will stop paying benefits until you request that they resume. Social Security will automatically resume paying the benefits at age 70 if you have not already requested that they be resumed. Under this strategy, you don’t have to repay any benefits received. But you won’t receive delayed retirement cred-its for the time between when benefits began and when they were suspended.
You will, however, receive delayed retirement credits for the time between when the benefits were suspended and when they eventually resume. This will increase your final retirement benefits above what you were receiving at the time benefits were suspended. The amount of the increase will be based on how many months the benefits were suspended. For people born in 1943 or later, each year benefits are delayed past FRA increases benefits by eight percent, or each month of delay increases benefits by two-thirds of one percent. FRA is based on the year you were born.
Full retirement age is 66 for those born in 1943 through 1954. For those born in 1955, FRA is 66 and two months. Those born in 1956 have an FRA of 66 and four months. Let’s say you are 63 today and need to replace some lost income. You can claim Social Security retirement benefits to begin immediately. If within the next 12 months you find a way to replace the lost income, you can withdraw the application for Social Security benefits and repay the benefits received.
If the income isn’t replaced before 12 months have passed or you can’t repay the benefits received, you continue to receive the benefits. At FRA, you can reevaluate the situation. If you can do without the Social Security benefits for a while, request to have the benefits suspended. Let the delayed retirement credits accumulate during the suspension while you rely on other income for your spending needs. Have the benefits resume at age 70, or earlier if you need the income. There are a few other Social Security issues many people misunderstand, and that causes them to make poor decisions about their benefits.
When someone is both working and receiving Social Security benefits, there is an earnings test that limits the benefits paid before FRA. Before FRA, $1 of benefits will be withheld for every $2 you earn over the annual limit of $18,240. (The limit is indexed for inflation each year.) In the year a person applies for benefits, an income limit of $1,520 applies for each month after the benefits begin. Once a person reaches FRA, there is no earnings limit. Benefits won’t be reduced no matter how much the person earns. Though the benefits are withheld, they aren’t permanently lost. Instead, after you reach FRA, the Social Security Administration will recalculate the monthly benefits you are due.
To the extent benefits were reduced in earlier years because of the earnings limit, future monthly retirement benefits will be increased. For each month benefits were reduced, the recalculation effectively takes away the reduction in benefits that was imposed for claiming benefits before FRA.
The point is that if you claim Social Security benefits now, the earning limit isn’t a good reason not to return to paid employment when you can. Though the benefits will be withheld to the extent you earn “too much” money, your future Social Security benefits will be increased. Over the long term, you won’t be penalized for working while receiving benefits.
Of course, after FRA, the earnings limit does not apply, so it is not a reason not to work if you can.Let’s look at a different situation.Suppose someone’s income declined because of job loss or a business downturn. This person is at least age 62 and hasn’t claimed Social Security benefits. He still plans to delay claiming benefits until at least FRA to maximize lifetime benefits.In this situation, the benefits eventually paid are likely to be less than the estimates issued by Social Security. That’s because the estimates issued by Social Security assume the amount of income earned in the latest year will be your earnings for each year until benefits are claimed. If some of those years have substantially lower earnings or no earnings, the retirement benefits paid are likely to be lower than today’s estimates.
The extent of the reduction depends on the individual’s earnings record. Benefits are based on your highest 35 years of earnings. If you already have 35 years of high earnings, not earning income for a few years won’t affect the benefits by much, if at all. In many cases, a few years with no income or lower income reduces lifetime benefits by less than $100 per month.
You can determine how a change in futures earnings affect your future benefits by opening a “my Social Security” account on the Social Security website (www.socialsecurity.gov) and using the benefits estimator to give you a custom estimate. When you’re considering a revision in your Social Security claiming strategy because of the pandemic, remember the key rule.
For married couples, it is very important for the higher-earning spouse to delay receiving benefits as long as possible, preferably to age 70. That’s because after one spouse passes away, the surviving spouse will receive only the higher of the two benefits for which the spouses were eligible. If money is tight, it’s best for the lower-earning spouse to claim benefits early while the other spouse waits to claim benefits.