Undoing a decision to claim benefits

I received an interesting question from a reader who had started collecting reduced Social Security benefits at 62 and had banked all the benefits.

She wonders if she can repay the money and apply for higher benefits at her current age of 65.

No, she can't repay her benefits.

The rules changed in December 2010. Your clients now have only a 12-month window to repay Social Security benefits after first claiming them. When benefits restart later, they will be based on the client's age at that time, resulting in a higher benefit.

SUSPENDING PAYMENTS

But there is another option for those who change their mind about the best age to claim Social Security benefits after the 12-month window has closed. Once clients reach the normal retirement age of 66, they can suspend their benefits, which will rise by 8% a year between 66 and 70.

If clients wait until they're 70 to resume claiming, the resulting monthly benefit will be 99% of what they would have received if they had waited until 66 to collect in the first place.

Here is how the math works.

Assume that a client is entitled to collect $2,000 per month at 66 but decides to collect benefits early, at 62, knowing that those benefits will be reduced by 25%. The client collects $1,500 per month and is satisfied.

As time goes on, however, the client regrets not waiting for the bigger payout. At 66, he or she can suspend Social Security benefits.

Using the $1,500 monthly amount as the base and benefit growth of 8% annually, benefits will be worth 32% more when the client is 70.

That is $1,980 ($1,500 x 1.32), which happens to be 99% of the original full benefit amount.

Using this strategy can be a great way to undo an ill-advised decision to claim early.

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