Social Security is a complicated program, and an interesting one at that. But while some of the program's rules may be fairly well-known, here are a few you may not be aware of.
1. You can undo your benefits once in your lifetime
You're entitled to your full monthly Social Security benefit, based on your earnings history, once you reach full retirement age (FRA). That age is somewhere between 66 and 67, depending on your year of birth. However, you can file for Social Security as early as age 62, albeit at a reduced benefit.
Many seniors opt to claim benefits ahead of FRA but then regret it after the fact. But if you go that route, you should know that the Social Security Administration (SSA) gives you one do-over in your lifetime. If you regret filing for benefits early, you can withdraw your application and repay the SSA all of the money it paid you within a year. From there, you can file for benefits at a later age and potentially avoid a reduction.
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2. You can grow your benefits by waiting
Just as claiming benefits ahead of FRA will result in a reduced monthly payout, delaying benefits past FRA will cause them to grow. Specifically, your benefits will increase 8% for each year you hold off on filing beyond FRA, up until age 70, at which point that incentive runs out.
3. You can't grow a spousal benefit
If you never worked but are married to someone who's entitled to Social Security (or are divorced from that person), you may be entitled to spousal benefits, which will pay you 50% of what your spouse or ex-spouse collects. But while regular Social Security benefits will increase by 8% for each year you delay them past FRA, spousal benefits can't increase -- so there's no sense in waiting to file once you reach FRA and are eligible to collect them in full.
4. Only your top 35 working years count toward your monthly benefit
While your Social Security benefits are based on your personal earnings history, it's only your 35 highest-paid years on the job that will count when calculating how much money you're entitled to each month. This means that if you're in your late 60s and are ready to retire from your part-time job, doing so may not impact your benefits at all if you have higher previous annual wages that can be incorporated into your personal calculation.
Similarly, if you earned a lot less at the start of your career than you did later on, those early wages won't necessarily pull your monthly benefit down because they simply may not get counted at all.
5. Higher earnings don't count toward your benefits
Though your monthly Social Security benefit is based on your top 35 years of wages, earnings beyond a certain threshold don't count. In 2020, for example, only your first $137,700 of income counts for Social Security purposes. In 2021, your first $142,800 will count. To be fair, these thresholds also limit the extent to which you pay Social Security taxes on your income, so at the end of the day, it evens out.
6. Working won't impact your benefits once you reach FRA
You may have heard that if you work and collect Social Security at the same time, you'll risk having some of your benefits withheld if your income exceeds what's known as the earnings test limits. But the earnings test only applies if you haven't yet reached FRA. Once you hit FRA, you can earn as much money as you'd like and still collect your monthly benefit in full.
7. You can request retroactive benefits in a lump sum
If you opt to delay benefits past FRA but then decide you need your Social Security income as quickly as possible, you're allowed to request a lump sum payment from the SSA in the form of retroactive benefits -- six months' worth, to be precise. Say you've delayed your filing and now, at age 68, you decide you want to not only start collecting a monthly benefit, but collect six months' worth. At that point, the SSA is required to pay you that lump sum.
Keep in mind, though, that if you request retroactive benefits, your monthly payment from that point on will be calculated based on the adjusted date of your claim. In our example, if you've just turned 68 and are entitled to a 16% boost in benefits for delaying for two years beyond an FRA of 66, requesting a six-month retroactive payout means you'll only end up with a 12% boost to your benefits.
Know the rules
Social Security is loaded with rules that may surprise you. Read up on as many of them as possible so you're able to not only plan well for retirement, but manage well financially once that milestone arrives.
