Image source: SSA Office of the Inspector General.
Many retirees rely on Social Security for most or all of their income in retirement. Before you make a decision that will have major financial implications for the rest of your life, it's important to know everything at stake in the timing of when you take your benefits. Here are a few things to consider.
Fewer big payments vs. more small payments
Most people have what amounts to an eight-year window to claim Social Security. Earliest eligibility is at age 62, and 70 is the latest age at which Social Security provides any financial incentive to wait. The key decision with Social Security is whether to take a reduced benefit that will give you the maximum number of monthly Social Security payments, or whether to wait and take a higher monthly benefit but receive it for a shorter period of time.
You can find plenty of articles discussing the trade-offs involved with claiming at age 62 versus waiting until full retirement age (currently 66) or age 70 to claim. But a lot depends on your individual situation. For instance, single retirees who won't have anyone else claiming on their work history can look solely at their own personal situation to make a smart decision about when to take Social Security. For those with family members who will receive spousal or survivor benefits, decisions that might make sense solely from your point of view might not be the best for your family as a whole. You can run numbers projecting which choice will result in your receiving more total money. But only you can make a personal assessment whether the true value of that extra money is worth the trade-off of having to wait for it. The important thing is not just to make a knee-jerk decision but rather to consider all the factors involved and what they mean to you and your life.
If you're working and claim early, Social Security could take back your benefits anyway
The worst result in many people's eyes is to start collecting Social Security benefits only to have the government take them away. Yet that's what happens to some people who continue to work in their early 60s and choose to take early benefits.
If you haven't yet reached full retirement age, there's a limit on how much you can earn before Social Security forces you to forfeit benefits. If you will not reach full retirement age this year and earn more than $15,720, then you'll lose $1 in annual Social Security payments for every $2 above the limit you earn. For those who hit full retirement age during the year, a higher limit of $41,880 applies to earnings before the day of the year you reach full retirement age, and the forfeiture is $1 for every $3 above the limit.
This forfeiture doesn't result in a complete loss, because the Social Security Administration treats you as if you had delayed taking Social Security for any full month of forfeited benefits. But if that's what's going to happen anyway, it can make more sense just to delay filing until your income will be under the threshold -- or until you reach full retirement age.
You can get a do-over on your decision, but only for a limited time
Many people regret their decision on when to take Social Security after the fact. There is a way to undo your claiming decision, but you have only a limited time to do so, and there are some key requirements that pose a hardship for many.
In order to get a do-over, you have to use a strategy that's known as withdrawing your Social Security applications. Form SSA-521 provides for this request, and it provides space for you to indicate the reason for the withdrawal and other related information. You can only file Form SSA-521 once in your lifetime, and it's only available within the first 12 months after your initial application for Social Security benefits.
The hardest part of the withdrawal application is that if approved, you have to return any money you received from Social Security since you claimed benefits. Many retirees aren't in a position to pay back up to a year's worth of Social Security payments, and that can make the strategy impractical for them.
The decision of when to take Social Security is a key one. Being informed is the first step toward making sure you do the best thing for your situation.
