You have an appointment with a client who has already elected Social Security and now realizes he has made a mistake. Whether because he didn’t think about how his election would affect his spouse, or he was unaware of the options, or for some other reason, he has now changed his mind. What are his options? While the so-called "Social Security withdraw and reapply" option is mostly gone as a strategy, there are actually still several ways to "undo" benefits, including choosing to pay back benefits within the first 12 months, going back to work to deliberately cause the Social Security Earnings Test to apply, voluntarily suspend benefits after full retirement age, or adjust the timing that a spouse starts benefits.
(Editor's Note: This guest blog post was written by Joe Elsasser, CFP®, RHU, REBC. Joe is an Advisor with Sequent Planning, and the creator of Social Security Timing, a web-based software package that provides analytical tools for advisors to determine the optimal timing for clients to claim Social Security benefits. This guest post originally appeared on the Social Security Timing website under the title "Social Security: How to Fix a Mistake".)
The Old Withdraw And Reapply Strategy
Under the old rules, you could file early, at 62 for example, and take reduced benefits all the way to 70. Then at 70 you could turn around, pay back all the benefits, and re-file for a higher benefit as though you had “delayed” claiming. Essentially, it equated to an interest-free loan from the government (using the benefits from age 62 to age 70, before paying them back), which the Center for Retirement Research at Boston College estimated could cost the Social Security system somewhere between $5.5 and $8.7 billion. Further, the “interest free loan” served no social purpose.
Consequently, the Social Security Administration changed the provision in December 2010, limiting the pay-back option to only being available within the first year after benefits are elected. But that doesn't mean your clients can no longer fix a mistake. Social Security recipients still have four options for changing or altering their benefits once they elect.
Option 1: Pay It Back
If the client changes his mind within the first 12 months of electing benefits, he can still file SSA Form 521 to withdraw (i.e., "undo") the original Social Security application, and pay back any benefits. If benefits were received by auxiliaries, such as a spouse or children, those benefits would also need to be repaid.
Once benefits have been repaid, the individual is treated as though he/she never elected to start benefits, which means he/she will not receive an actuarial reduction due to the original filing. Subsequently, that individual can apply for benefits again in the future - with an age-appropriate adjustment at that time - or can file a restricted application for spousal benefits.
Option 2: Go Back to Work
For instance, let’s say your client elected benefits at 62 and was receiving an $1,800 monthly benefit (75% of $2,400) and now wants to go back to work at 63 earning $90,000 per year. $90,000 - $14,640 is $75,360. Divide that by two and the earning penalty would be $37,680. Since that is greater than the total Social Security benefit of $21,600, the client would not receive any Social Security benefits for this period.
Option 3: Voluntarily Suspend
Here’s where it gets interesting, as we follow the math. By electing at age 62, the client basically reduced monthly benefit to 75% of what would have been received if elected at FRA. By suspending benefits at age 66, though, the monthly benefit will increase by 8% per year until age 70, for a total of 32%, as the client earns delayed retirement credits because benefits aren't being paid. And notably, if you increase 75% (the original reduced benefit) by 32% (the delayed retirement credits increase) you get 99% (.75 x 1.32 = .99). In other words, you can take Social Security from 62-66, suspend from 66-70, start again at age 70, and still get 99% of the benefit you would have gotten had you simply waited until full retirement age in the first place!
Option 4: Maximize Benefits for your Spouse who has not yet elected.
Even if one member of the couple has already started Social Security benefits, the reality is that there are still multiple claiming strategies available to decide when the remaining member of the couple should start benefits, including starting early, at full retirement age, delaying until age 70, or filing a restricted application to start spousal benefits but delay personal benefits.