3 Social Security do-over options

Here are strategies that can be helpful for clients who have regrets over the timing of their Social Security claiming decision, whether they claimed early rather than holding out for a bigger check or waited longer than necessary.

I often receive emails from financial advisers asking for guidance on how to help a client undo a Social Security claiming decision.

Sometimes it involves someone who claimed benefits early and now regrets collecting reduced monthly benefits rather than holding out for a bigger check. In other cases, a client may have waited longer than necessary to claim a benefit and now wonders if there’s a way to recoup that loss. And sometimes a client is looking for an infusion of cash to get them through a temporary rough spot.

The good news is there are three do-over options that an individual can use to change a Social Security claiming decision after the fact. But each option involves specific rules. These strategies have sparked renewed interest in the wake of the Covid-19 pandemic, when some older clients had to revise their retirement plans either because they stopped working earlier than planned or realized that they could extend their careers a few more years by working remotely.

The first do-over option involves withdrawing an application for Social Security benefits. Anyone can withdraw their application within 12 months of first claiming benefits by filing Form 521.

But there’s a catch. You must repay any benefits that you have received, including those of any family members who have been collecting benefits on your earnings record, such as a spouse or minor child. You can only withdraw your application for Social Security benefits once, but you can apply for benefits again later when the monthly amount would be larger.

Withdrawing an application for Social Security benefits is a bit more complicated if you are already enrolled in Medicare. Although you can choose to continue your Medicare coverage, you must pay your Medicare Part B and Part D premiums directly as you will no longer be able to have the premiums deducted from your monthly Social Security benefits.

If repaying Social Security benefits would create a financial hardship, there is another do-over option, but an individual must wait until he or she reaches full retirement age or later. At that point, a client can suspend his or her Social Security benefit.

The good news is people who suspend their benefits do not have to repay anything. The bad news is their monthly Social Security benefits stop and so do those of any dependent family member (except a divorced spouse). During the suspension, benefits earn delayed retirement credits of two-thirds of 1% per month, for a total of 8% per year up until age 70.

Suspended benefits would automatically resume at 70, or a client could choose to resume Social Security benefits earlier, but would only receive delayed retirement credits for the period when benefits were suspended.

Assume a client with a full retirement age of 66 claimed benefits four years early at age 62. He would receive 75% of his full retirement age benefit amount. If that client suspended his benefits at age 66, his monthly benefits would stop but they would start earning delayed retirement credits of up to 32%. At 70, his benefits would be worth 99% of his full retirement age amount (75% x 1.32).

This strategy offers added benefits to married clients. If that client died first, his widow would receive the larger amount as a survivor benefit. A survivor benefit is worth up to 100% of what the deceased worker was receiving or entitled to receive at the time of death.

A third option involves requesting a lump-sum payout of up to six months of retroactive benefits. You must be full retirement age or older to request a lump-sum payout, and retroactive benefits cannot begin before full retirement age.

So someone with a full retirement age of 66 who applies for benefits at 66 and 6 months could receive the maximum six months of retroactive benefits but someone with the same full retirement age who files for benefits at 66 and 3 months could only receive three months of retroactive benefits. Individuals who claim Social Security benefits before their full retirement age are not eligible for retroactive benefits.

A lump-sum payout can make sense for clients who waited until after their full retirement age to claim either spousal or survivor benefits — both of which are worth their maximum amount at the beneficiary’s full retirement age. Unlike retirement benefits, spousal and survivor benefits do not earn delayed retirement credits.

Requests for a lump-sum payout also makes sense for a client in need of immediate cash. And here’s another strategy: After receiving a lump-sum payment, that client could then voluntarily suspend benefits and earn delayed retirement credits up to age 70, boosting future monthly benefits.

[Questions about Social Security rules? Find the answers in Mary Beth Franklin’s ebook at Maximizing Social Security Retirement Benefits]