Social Security Claiming can be Confusing.

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Social Security can be confusing; even the hard-working people working in Social Security offices don't always get it right. Here are the two questions advisors often get asked.

I applied for early benefits and now wish I hadn’t.  What can I do?

It depends.  If it’s been less than 12 months since you first applied, you can withdraw your application and repay your benefits.  You can then reapply at any time in the future.

However, if it’s been more than 12 months, and you are now over full retirement age (FRA, which ranges between 66 and 67 depending on your birthday), you can suspend your benefit and earn the 8% annual delayed credits on the current amount.

Example: Fred applied for Social Security at 62. His primary insurance amount (PIA) is $2,000. (The PIA is the amount he would receive if he claimed his benefit at FRA.)  Because he claimed at 62, his benefit is 70% of $2,000, or $1,400. When he turns 67 he can suspend his benefit and earn 8% annual delayed credits on the $1,400. When he turns 70 he can claim his benefit and raise his permanent benefit to $1,736 ($1,400 x 1.24 = $1,980). Note that if Fred suspends, no spousal or dependent benefits can be paid on his record while it is in suspension.  If you are under full retirement age you may not voluntarily suspend your benefit. However, you can achieve the same result by going back to work.   And, that’s not bad, as you’ll see.

Don’t I lose money if I go back to work after starting Social Security?

If you are under full retirement age, some or all of your benefits may be withheld.  That’s ‘withheld’, not lost.  

$1 will be withheld for every $2 that you earn over the earnings test threshold, which is $18,960 in 2021. Sounds bad, but read on.  Those benefits aren’t lost. In fact, it may be a good reason to go back to work, because your benefit will be recomputed at FRA to remove the actuarial reduction for those months in which your benefit was withheld. In other words, it will raise your benefit going forward.  True!

Let’s say your PIA is $2,000 and you applied for benefits at 62. Your reduced benefit is $1,400 (70% of $2,000). At age 64, you go back to work and earn enough so that all of your benefits are withheld. When you turn FRA (67), your benefit will be recomputed to make it as if you had applied at age 64! Going forward you will get 80% of $2,000, which comes to $1,600. Then, if you were to suspend your benefit at FRA, you can earn 8% annual delayed credits on the $1,600. When you claim your benefit at 70, it will be $1,984 (not counting cost-of-living adjustments or the effect of additional earnings). Going back to work is a great way to increase your Social Security benefit, and benefit from the earnings themselves.

How about that, sports fans?

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Jim's picture
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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