Social Security provides the lion's share of most retirees' income during their golden years. It's critical to take your benefits at the time when they'll do you the most good. Before you make that key decision, you owe it to yourself to learn as much as you can about how the timing of when you take Social Security will affect your finances. Below, we'll discuss some of the most important elements of Social Security to keep in mind.
1. Understand when Social Security can take back your benefits if you're still working
Many people like the idea of continuing to work while taking Social Security. That way, they can ease back, perhaps working part-time as they phase into retirement. However, before you make that decision, you need to know the circumstances under which the Social Security Administration will claw back your benefits.
The key question is whether you've reached full retirement age, which for those born from 1943 to 1954 is 66 and for those born in 1955 is 66 and two months. If you're younger than your full retirement age, then there's a maximum you can earn before you'll have to give back some of your Social Security. For 2017, that limit is $16,920 for those who won't reach full retirement age during the year, and if you earn more than that, you'll lose $1 in annual benefits for every $2 you earn above the limit. If you will reach full retirement age during 2017, the limit is higher -- $44,880 -- and you'll lose $1 for every $3 over the limit in earnings.
Social Security does give you some credit for your lost benefits if this happens to you. For every month's worth of benefits you lose, you get treated as if you had retired a month later. The result is an incremental boost in your future monthly benefit check, but it will still take you years to earn back the lost amount. For many, this means it makes more sense just to wait before claiming Social Security in the first place. Once you reach full retirement age, you can earn as much as you want and keep all your Social Security.
2. Know when waiting will give you bigger payments
More generally, timing is the biggest question most people have about Social Security. The biggest positive of claiming as early as age 62 is that you get a larger number of checks during your lifetime. However, that comes at the cost of accepting smaller monthly payments. By contrast, you can get bigger checks, but only at the cost of giving up months or even years in benefits in your early and mid-60s.
However, it's essential to know the rules, because sometimes it doesn't pay to wait. For instance, with your own retirement benefits, the monthly check you'd receive steadily rises as you wait from 62 to 70, with age 70 benefits being as much as 75% higher than what you'd receive at age 62. That's the reason why you'll see so many analysts talking about the benefits of claiming at age 70.
If you're claiming spousal benefits on someone else's work history, however, the rules governing increases are different. In that case, you only get boosts up to your full retirement age. From 66 to 70, there is no increase available. It therefore makes little sense to wait in that scenario. The same is true for survivor benefits -- when the surviving spouse reaches full retirement age, the survivor benefit reaches its maximum, and no extra money is available from waiting until 70.
3. Be aware of the timeline for changing your mind
It's important to get your Social Security decision right, but if you realize you've made a mistake, you might be able to change your mind. Social Security allows you to use a process known as withdrawing your Social Security application, and that has the effect of undoing your initial decision and letting you claim at a later date.
In order to use this provision, you'll need to file Form SSA-521 with Social Security. This is a once-in-a-lifetime option, and you only have 12 months from when you first apply for Social Security benefits to use it. If your request is granted, you have to return all benefits you've already received, but at that point, you're treated as if you had never filed.
Applying for Social Security is one of the most important decisions you'll make. By knowing these three key elements of the program, your decision will be the right one for you.