How to Correct a Faulty Claiming Age Decision
Good to Know
You may find yourself advising clients and prospects that were either misinformed or unaware of the consequences of claiming Social Security benefits too early. A potential, if not common, client angst is the realization that age 62 was NOT a wise claiming age decision. A client could face three unwelcome results from claiming Social Security Retirement benefits at age 62 instead of waiting until their normal retirement age (65 to 67, depending upon year of birth). The unwelcome results include,
- A lifetime of permanently reduced retirement benefits of up to 30%,
- A lifetime of permanently reduced survivor benefits for your client’s spouse, and
- Further reduction of benefits for income earned in excess of thresholds1 until after normal retirement age if your client continues to work after claiming benefits.
However, all may not be lost; there are at least two potential fixes. While these fixes may not be as effective as making the right claiming age decision in the first place, they could restore all or most of the reduced benefit.
Potential Fix 1: The Do-Over
A client gets a once-in-a-lifetime “do-over” within the first 12 months after first claiming a retirement benefit. Clients within the 12-month window may repay all benefits received, and the claiming age “clock” is reset as if no claim for benefits were filed.
Potential Fix 2: Suspend At Normal Retirement Age
This idea is for clients beyond the 12-month window or those without the wherewithal to repay benefits. Upon reaching normal retirement age, your client can suspend benefits until age 70 and earn delayed retirement credits. This approach may restore much of your client’s lost monthly benefits, as illustrated by the following example.
Example—Assume your client Jane’s retirement benefit at age 66 (her normal retirement age) would be $2,000. Jane claimed and began collecting a reduced benefit of $1,500 at age 62. If she suspends benefits from age 66 until age 70, she will earn delayed retirement credits of 32% (8% per year). Her retirement benefit at age 70 will be $1,980 (a 32% increase to the $1,500).
Caveat: Jane needs to live until approximately age 852 to collect more lifetime benefits under the “Suspend at Normal Retirement Age” strategy versus continuing to take her reduced benefits for life.
Summary
The Social Security claiming age decision may be one of the most important financial decisions your client will ever make. Claim too early and lock in a lifetime reduction of benefits of as much as 30%. Claim at age 70 and run the risk that premature death will make that a poor decision. What is our point? The claiming age decision involves far too many variables to discuss within the scope of this blog. This decision should be made in consultation with an experienced CPA, CFP® certificant, or Social Security expert.
Disclaimer
The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide Social Security, retirement, tax, legal, insurance, investment, compliance or financial advice. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.
1 Benefits will be reduced by $1 for every $2 earned in excess of $19,560 (2022, as indexed). The client could eventually recover these benefits if they lived long enough.
2 Estimate only, may vary based upon other factors.
