Whether you're currently retired or part of the estimated 175 million covered workers in the labor force, Social Security is likely going to play a key role in your retirement. More than three out of five retired workers today rely on the program for at least half of their income, while 84% of nonretirees told national pollster Gallup in April that they plan to lean on Social Security in some capacity during retirement. These are eye-popping numbers that demonstrate the importance of this program.
However, these figures also suggest that there's probably no decision more important for seniors than deciding when to begin taking their entitlement. After all, if more than 60% of existing aged beneficiaries depend on the program for half of their monthly income, you don't want to make a poor claiming choice and risk leaving thousands, or tens of thousands of dollars lying on the table.
There is no one-size-fits-all Social Security claiming strategy
The thing is, though, deciding when to claim Social Security is tricky and sort of a crapshoot.
To begin with, we're making a decision without knowing all the facts. For example, none of us (thankfully!) knows our expiration date.
If we were to examine two identical retired workers, with the same income, work history, and date of birth, the one who waits until age 70 to claim their benefit could earn as much as 76% more per month than the person claiming as soon as possible at age 62. That's because for each year an individual holds off on their claim, beginning at age 62 (the earliest age to begin receiving a retired worker benefit), their payout grows by approximately 8%, up until age 70.
But there's a trade-off to be made here. Waiting longer will give you a higher monthly payout, but the individual claiming earlier and accepting a permanent reduction to their benefit will receive a check for up to 96 months prior to the senior who decides to wait. On paper, if you're healthy and believe you'll live longer than the average U.S. life expectancy of almost 79 years, then waiting and claiming later makes more sense. Meanwhile, if you don't believe you'll reach the average life expectancy, then an earlier claim will maximize what you'll receive over your lifetime. There's simply no definitive way to ensure you're making the optimal choice.
The other issue is that there's no perfect formula that lays out when seniors should file for benefits. There are certainly some rough guidelines for seniors to follow based on their health, the size of their retirement nest egg, and their marital status, but there is no one-size-fits-all claiming strategy.
This Social Security move makes more sense now than it has in a long time
Yet, for as much of a crapshoot as the claiming strategy may seem at times, one particular Social Security move appears to be more attractive now than it's been in nine years, if not arguably longer.
For all future retirees, as well as seniors who've begun taking their entitlement within the past 12 months, Form SSA-521 (officially, Request for Withdrawal of Application) is an option. Form SSA-521 is basically a Social Security mulligan for folks who regret claiming their benefit earlier than they'd have liked to. Here's how it works. If you fill out your request, and the Social Security Administration approves it, your claim will be undone. In doing so, your benefit will continue to grow at roughly 8% per year until such time as you decide to claim it for good.
There are, of course, two caveats with this Social Security do-over. First, as noted, beneficiaries have just 12 months after they begin receiving their entitlement to file Form SSA-521. Secondly, they'll have to pay back every cent in benefits they've received in order to undo their claim – and yes, this includes any income a spouse or child may have earned as a result of your claim.
Though this Social Security mulligan has been around for a while, the ability to undo your claim, especially for early claimants who've struggled to find work and therefore generate income, makes a lot of sense right now.
According to August employment data from the Bureau of Labor Statistics, the yearly rate of pay increases to workers rose to 2.9%, from 2.7% in July. This marks the highest rate of wage growth since June 2009. A tight labor market where the unemployment rate sits below 4% has given workers more wage power than they've had in a long time.
You see, seniors in their early to mid-60s have likely built up the skills and experience in their particular field of work to command a healthy wage in the current job environment. Assuming they can find a job that's commensurate with their work skills and experience within 12 months of receiving their first entitlement, it may behoove early filers to consider undoing their claim, thus allowing their benefits to grow by 8% per year, once again. This is as strong of a job market as we've seen in a long time, and that's the perfect opportunity to put Form SSA-521 to work.