Mulligan? How to undo a Social Security claiming decision

I received an interesting question the other day from a reader who had started collecting reduced Social Security benefits at age 62 and had banked all the benefits. Now that she is 65, she wondered if she could repay the money and apply for higher benefits at her current age.

No, she can’t repay her benefits. As of December 2010, the rules changed so that now you only have a 12-month window to repay Social Security benefits after first claiming then. When you restart your benefits later, they will be based on your age at the time of claim, resulting in a higher benefit.

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 you reach your normal retirement age of 66, you can voluntarily suspend your benefits–but not repay them. Your benefits will increase by 8% per year between ages 66 and 70.

If you wait until age 70 to resume claiming, the resulting monthly benefit will be worth 99% of what you would have received if you had waited until 66 to collect benefits in the first place.

Here’s how the math works. Assume you are entitled to collect $2,000 per month at your normal retirement age of 66. But you decide to go ahead and collect benefits early at age 62, even though you know they will be reduced by 25%. So you collect $1,500 per month and you’re satisfied.

But as time goes on, you wish you had waited for the bigger payout. So at 66, you can voluntarily suspend your Social Security benefits. Using the $1,500 monthly amount as the base, your benefits will grow by 8% per year between ages 66 and 70. At age 70, they will be worth 32% more. That’s $1,980 ($1,500 x 1.32) which happens to be 99% of your original full benefit amount.

Some people look at this strategy of claiming early, banking the benefits, and voluntarily suspending to lock in bigger benefits later as a win-win strategy. Personally, I think it is a bit dicey, particularly for married couples. If the main breadwinner dies prematurely during the early collection period before he has a chance to suspend benefits later, he could inadvertently leave his surviving spouse with a smaller-than- intended survivor benefit. Survivor benefits are worth 100% of what the worker received during his life or was entitled to receive at the time of death.

But for a single individual, like this reader, voluntary suspension at normal retirement age can be a great way to undo an ill-advised early claiming decision and boost guaranteed income that will last a lifetime.