As we age, we're liable to face a number of big decisions. But none are likely to have more importance on our financial well-being than our decision on when to take Social Security benefits.
According to the Social Security Administration, 62% of seniors lean on their benefit to provide at least half of their monthly income, with a third essentially relying on Social Security as their sole source of income. This means that our claiming age can play a pretty significant role in determining how much we'll be taking home each month during retirement.
Your claiming decision has a big impact on your Social Security payout
As a brief refresher, there's an assortment of factors that can influence what you're paid by the Social Security Administration, assuming you've met the requirements to receive a retired worker benefit.
The first two of these factors are intertwined: your work and earnings history. The Social Security Administration will take into account for 35 highest-earning, inflation-adjusted years when calculating your retired worker benefit. Not only does this mean that you'll want to earn as much as you can each year (up to the payroll tax cap) in order to beef up your eventual payout, but you'll also want to work a minimum of 35 years, if not longer. Each year less of 35 worked results in a $0 being averaged into the calculation.
A third benefit influencer is your full retirement age, which is determined by your birth year. Your full retirement age is the age at which you become eligible to receive 100% of your monthly payout. Put plainly, claiming benefits prior to your full retirement age means accepting a permanent reduction to your monthly payout, whereas claiming benefits after your full retirement age can increase your monthly payout above 100%.
The last factor, but arguably the most important, is your claiming age. Benefits grow, on average, by 8% for each year an eligible recipient holds off on taking their payout, beginning at age 62 and ending at age 70. All things being equal, an individual claiming at age 70 can bring home as much as 76% more per month than a person claiming at age 62.
While claiming early sometimes makes sense, it's not always optimal
But, as you're probably aware, there are a lot of variables that go into deciding when to take benefits. With the goal being to maximize what you'll receive over your lifetime from the program, not just per month, optimal claiming ages can vary.
For example, some folks are actually better off claiming earlier rather than waiting until after their full retirement age. A person who isn't in good health is one example of someone that you'd expect to collect more in lifetime benefits if they claim early.
Another example would be a lower-earning spouse. Generally speaking, it often makes more sense to allow the benefit of a higher-earning spouse to grow over time, while utilizing the payout of the lower-earning spouse to generate household income until such time as the income breadwinner begins taking their payout.
However, not everyone is necessarily happy with the claiming decision they've made. For instance, a senior who's struggled to find work and has no other sources of income might be forced into taking Social Security early. High debt levels, and being wealthy and presuming that Social Security income won't matter much, are two additional reasons folks might claim early, but then later regret that decision due to the permanent reduction in monthly benefits.
According to the 2019 MassMutual Social Security Pulse Check, more than a third of the 618 respondents who filed for early retirement benefits regretted their decision to do so.
Turn that regret into opportunity
But what you may not realize is that some of these early claimants who regret their decision to take benefits early may be able to turn back the clock, so to speak. That's because the Social Security program has a little-known do-over clause known as Form SSA-521 (officially known as a Request for Withdrawal of Application).
As its official name suggests, this is a form you file with the Social Security Administration that, if approved, allows you to undo your claim for benefits. In effect, it'll be as if you never filed for and took benefits in the first place, which means that your payout will go back to growing at roughly 8% per year, once again.
Of course, there are two pretty substantial catches if you want to take advantage of this Social Security mulligan. First, you only have 12 months from the date of first receiving benefits from the program to file the paperwork to undo your claim. That means if you began taking Social Security benefits three years ago, Form SSA-521 will do you no good now.
The second requirement of Social Security's do-over clause is that all benefits received will need to be paid back in full to the Social Security Administration. Whether you received one month's worth of benefits or nearly a full year, you'll need to return every penny if approved to undo your claim.
However, if you do meet these requirements, the reward can be well worth it. If, for example, you were forced to claim benefits early because you couldn't find employment, but wind up landing a well-paying job within a year of first receiving benefits, this Social Security mulligan could be perfect for you.
Though Form SSA-521 flies mostly under the radar, it has the ability to turn regret into opportunity under the right circumstances.