Social Security "Do-Over?" Yep...
Recently I met a new wealth management client. This gentleman, who we’ll call Bob, is age 67, began his Social Security retirement income at age 64 when he was laid off, but went back to work about 14 months later. The position he currently holds pays him plenty of income for his needs with money left over, and he really sort of wishes he could have done things differently with Social Security. His plan had always been to wait and take it as late as he could, because unlike the normal statistics with most men, everyone in his family tends to live into their late 90s. However, when he got laid off, even though he had portfolio resources he could have used, he feared he’d never get reemployed and felt it best to go ahead and start his Social Security retirement income benefit.
Upon hearing his story, I asked him if he wished he had the ability for a “do over” with Social Security. “Yes,” he said, “that would sure be nice.”
It’s always fun as a financial planner when I get to play ‘hero’. No, I’m not saving anyone’s life or truly saving the day, but sometimes there are ways to help people do things financially that do really make an impact. Such was the case here.
I advised Bob that in fact, he could have a bit of a “do over” with Social Security. The rules are these: once a person reaches Full Retirement Age (FRA), which in his case was age 66, then they can turn off (technically “suspend”) their social security benefits. From the time it is turned off, until age 70, the Social Security benefits will then grow by Social Security’s guaranteed 8% per year (0.66% per month). This allows the benefits to grow and perhaps catch up to the Full Retirement Age benefit the worker would have earned, or even a bit more.
The way the math works out, an individual who takes Social Security at the earliest eligibility age of 62, draws it until Full Retirement Age (FRA) and then turns it off from FRA until age 70, would gain back the reduction in retirement income they suffer by drawing their Social Security retirement benefits early.
Let’s look at an example:
Betty draws her Social Security retirement income at age 62 and gets $13,200/year in benefits. If she had waited until Full Retirement Age (FRA) of 66, she would have gotten $18,700/year, which is $5,500 more per year. Later, at age 66, Betty decides that she doesn’t really need her Social Security retirement income, and likes the idea of receiving a bigger retirement paycheck later to help her handle expenses when she’s older. She suspends her Social Security retirement income from age 66 until age 70. Her retirement income benefits will then grow again by 8% per year for four more years, giving her $17,958/year at age 70 – nearly the retirement income amount she would have gotten had she first drawn her Social Security retirement income benefits at her FRA ($13,200 age 62 benefit x 8%/year = $17,958).
Now, if we’re suspending benefits, we have to realize that we’re giving up retirement income today that we would have otherwise received. In Betty’s case, she’s giving up four years at $13,200/year, which equals $52,800 by the time she’s 70. It’ll take Betty eleven years to recoup the retirement income she’s given up in order to receive that bigger benefit. So, the real question Betty has to ask herself is, does she think she’ll live until age 81 or beyond? If so, then she’ll come out ahead by taking a ‘do over’.
Another way to have a ‘do over’ with Social Security is to turn off retirement income benefits within 12 months of initially filing. If a person does this, and also repays all the money received, then Social Security treats that person as if they never filed in the first place. In this way, they can file again in the future, and receive a higher retirement income amounts commensurate with the future age they finally draw.
Back to my new client, Bob: he was really happy to learn that he could turn off his retirement income benefit from now (age 67) until age 70 as he’s currently planning, get Social Security’s 8% per year rate of return, lower his taxable income while he continues to work, and get more retirement income benefits down the road. Bob will also enjoy a bigger annual cost of living increase (COLI) in the future, since his Social Security retirement benefits will be larger. Knowing this one little rule allowed me, as he put it, to be his ‘hero of the day’.
More information about these rules may be found on Social Security’s website, here: http://www.ssa.gov/planners/retire/withdrawal.html
Michelle Ash, CFP®, CASL®, is a Managing Partner for Paragon Wealth Strategies, LLC. Please see her bio here.
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