Social Security do-overs and lump sums

People who claimed Social Security early and now regret it have two opportunities to reverse that decision.

We all have regrets. But for people who claimed Social Security early and now wish they hadn’t, there’s a do-over solution that can reverse an early claiming decision and result in larger future benefits. In fact, there are two do-over opportunities. And for some people, there may be a lump-sum payout option.

Social Security retirement benefits are available as early as age 62, but they are reduced by 25% to 30% compared to what you would receive if you claimed at your full retirement age, which ranges from 66 to 67 depending on your birth year. If you’re patient, there’s a big payoff for postponing benefits. You earn an extra 8% per year in delayed retirement credits for every year you wait to claim benefits beyond your full retirement age up to age 70.

The difference between claiming benefits as early as possible at age 62 and the maximum age of 70 is a whopping 76% increase in monthly Social Security benefits for life.

You can change your mind within the first 12 months of claiming Social Security benefits and cancel your application. This process is called a  withdrawal and you are limited to one withdrawal per lifetime. You can reapply for Social Security benefits later.

But there’s a catch. When you withdraw your application, you must repay all the benefits you’ve received, as well as those of anyone who has received benefits on your record, such as a spouse or child. Repayment includes Social Security benefits plus any money withheld from those benefits to pay for Medicare premiums or voluntary federal income tax withholding.

Repaying your benefits wipes the slate clean as if you had never applied for Social Security, so when you claim Social Security in the future, your benefit will be based on your new, older age at time of claim. That will result in a larger monthly benefit, plus any cost-of-living adjustments that were awarded since you became eligible for Social Security at 62.

If you already have Medicare and you decide to withdraw your application for Social Security, you must clearly state on form SSA-521 whether you want to keep your Medicare benefits. There’s a box to check yes or no. If you keep your Medicare coverage, you will pay your premiums directly to the Centers for Medicare and Medicaid Services.

If you miss that 12-month window to withdraw your application, or if you would rather not repay your benefits, you have another option to reverse a Social Security claiming decision. But you have to wait until you reach your full retirement age or later to do so.

Once you reach your full retirement age, but you aren’t yet 70, you can suspend your benefits. Your monthly checks will stop but you’ll start earning delayed retirement credits for each month your benefits are suspended. Your benefits will automatically start again the month you reach 70 — unless you request benefits be reinstated before then.

But beware: If you voluntarily suspend your retirement benefit and there are other people who receive benefits on your record, they won’t be able to receive benefits for the period that your benefits are suspended. However, there’s one exception: A divorced spouse can continue receiving benefits on your earnings record even if you suspend yours.

If you’re enrolled in Medicare and you suspend your Social Security benefits, CMS will bill you for Part B premiums. If you don’t pay the premiums on time, you could lose your Part B Medicare coverage.

RETROACTIVE BENEFITS

People who wait beyond their full retirement age to file for Social Security also have the option of receiving up to six months of retroactive benefits in a lump sum.

Let’s say you were born in 1954 and your full retirement age is 66. You plan to file for benefits in December this year when you turn 69. You have two options. You can claim Social Security at age 69 and receive your full retirement age benefit plus three years’ worth of delayed retirement credits or you can request a lump sum payout of six months of retroactive benefits.

If you choose the lump sum option, you would be paid monthly benefits as if you claimed at 68 and 6 months rather than 69. That’s because you can’t collect delayed retirement credits and retroactive benefits for the same period.

Keep in mind, Social Security benefits are subject to federal income taxes. If you chose a lump sum payout, you could increase your income taxes for the year, and if the lump sum payout pushes you above certain income thresholds, you might also be subject to Medicare high-income surcharges down the road.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2023 ebook at MaximizingSocialSecurityBenefits.com.)