The importance of Social Security is arguably unparalleled among all social programs. Data from the Social Security Administration (SSA) shows that more than 3 out of 5 aged beneficiaries are reliant on their monthly checks to account for at least half of their monthly income, with 34% leaning on Social Security for virtually all (90% to 100%) of their income. Without this guaranteed payout, it's very likely we'd see millions of elderly folks struggling to make ends meet during retirement.
Given the reliance of senior citizens on Social Security, there's perhaps no decision more important than deciding when to claim benefits. After all, your claiming decision will have a profound impact on what you'll receive in benefits each month.
A refresher on how your Social Security benefit is determined
Although there are seven factors that could affect your take-home pay from Social Security, there are really four key factors:
- Your work history
- Your earnings history
- Your birth year
- Your claiming age
As you can see, you have control over three out of these four factors, putting the ball in your court as to how much you'll receive from Social Security.
The first two factors are somewhat intertwined. When calculating your full retirement benefit, the SSA will take into account your 35 highest-earning, inflation-adjusted years. So to have a chance of maximizing what you'll receive from Social Security each month, you'll need to work a minimum of 35 years -- each year less of 35 results in a $0 being averaged in -- and you'll want to earn as much as you can in the years you work. Since you often gain work experience and skills as you age, working into your 50s and 60s can be particularly helpful in lifting your 35-year average income, thus increasing your monthly retirement benefit.
Your birth year you can't control, but it will dictate your full retirement age, or the age at which the SSA deems you eligible to receive your full benefit. If you begin receiving benefits before reaching your full retirement age, you'll be accepting a permanent reduction to your monthly payout. If, on the other hand, you wait until after your full retirement age before filing for benefits, you could actually receive a boost to your full retirement age benefit. For baby boomers and all future retirees, your full retirement age falls somewhere between ages 66 and 67.
Lastly, there's your claiming age. The SSA allows you to begin taking Social Security retired worker benefits at age 62, or at any point thereafter. And for each year you hold off on taking benefits, your eventual payout grows by approximately 8%, up until age 70. Assuming we were looking at two identical individuals with the same birth year, work history, and earnings history, the one claiming at age 70 could receive up to 76% more per month than the one claiming at age 62.
However -- and this is an important point -- the goal isn't to maximize what you'll receive monthly from Social Security. Instead, you want to set yourself up to receive as much as possible over your lifetime. This means your financial and physical health, marital status, and other factors, could determine what claiming age is right for you.
You may be able to increase your benefits after filing for them
Generally speaking, once you sign up for Social Security benefits, you're considered locked into that decision. But for some folks this isn't the case. For every working American who isn't yet of Social Security claiming age, as well as those people who've begun receiving Social Security retirement benefits within the past 12 months, Form SSA-521 (officially known as the "Request for Withdrawal of Application") may be an intriguing option.
What is Form SSA-521? Essentially, it's a Social Security do-over clause that the agency doesn't tend to advertise much. If you file for Social Security benefits and, within the next 12 months, regret that decision, you can file Form SSA-521 to undo your claim. If the SSA approves your petition, it'll be as if you never claimed benefits in the first place. Under such a scenario, your Social Security benefits will once again be growing at 8% per year until you do decide to officially take them.
Who might want to take advantage of this neat Social Security trick? As an example, if you're in your early to mid-60s and you've struggled to find work, you might be coerced into filing for Social Security benefits early in order to generate income. In doing so, you'll be accepting a permanent reduction to your monthly payout. But let's say you land a well-paying job within the 12-month window following your claim. You could file Form SSA-521, undo your claim, and allow your Social Security benefits to grow once more, ultimately setting yourself up for a larger monthly payout when you eventually file for benefits again in a few years' time.
Now, understand that this Social Security trick does come with two notable conditions. First, in order to completely undo your benefits, you'll need to pay back every cent you've received from the SSA. If you made this choice, say, 10 months after you began receiving benefits, you'd have to pay the SSA back 10 months' worth of benefit checks. To add, this will also include anyone who might be receiving benefits as a result of your claim, such as a spouse or children.
Second, as noted, there's a strict limit of when this do-over clause can be invoked of 12 months following your date of entitlement. Prior to 2010, Social Security recipients had years to decide if they wanted to withdraw their benefits and, in the process, repay years' worth of received retired worker benefits. However, a change in policy in late 2010 narrowed the scope of this mulligan to just a 12-month window.
Though Form SSA-521 isn't well-known, it can be an invaluable tool to those who regret filing early for benefits. And, if used correctly, it's a solid trick to increase your payout, even after you've initially filed for benefits.