Do You Need a Mulligan on Social Security?
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Did you know Social Security has provided a six-month “mulligan” for those between full retirement age and 70? Of course, decisions are always easier when you have a “do-over” option!
Social Security 101
To qualify for Social Security benefits, you need to obtain 40 or more work history credits, earned quarterly. Therefore, you need to have worked for ten or more years to receive a benefit. The first part of your benefit amount is calculated based on your earnings history and the average of your highest 35 years of wages. The second part of your benefit amount depends on the age when you start collecting Social Security.
You have probably heard the term “full retirement age” (FRA), which ranges from 66 to 67 years old, depending on your birth year (ssa.gov). At your FRA, you will receive a monthly benefit amount that equals your Primary Insurance Amount, as calculated by the Social Security Administration. (https://www.ssa.gov/OACT/COLA/Benefits.html).
Reduced Amount: Claiming at Age 62 versus Full Retirement Age
However, you do not have to wait until your FRA to claim benefits; you can receive a reduced benefit as early as age 62. The amount of the reduction varies based on your full retirement age.
For example, if your full retirement age is 66 + 0 months and you decide to start your Social Security benefit at age 62, your amount is reduced by approximately 25.00%. The reduction at age 62 for other full retirement ages are indicated below:
- FRA of 66 + 2 months, benefit at 62 reduced by approximately 25.83%
- 66 + 4 months – reduced approximately 26.67%
- 66 + 6 months – reduced approximately 27.50%
- 66 + 8 months – reduced approximately 28.33%
- 66 + 10 months – reduced approximately 29.17%
- 67 + 0 months – reduced approximately 30.00%
It’s important to note that if you start benefits at age 62 and decide to return to work before FRA, $1 in benefits is deducted for each $2 in earnings above the annual limit of $19,560 (2022). In the year you reach full retirement age, your Social Security benefits are reduced by $1 for every $3 you earn over $51,960 (2022) until the month you reach FRA. You will receive your full Social Security benefits at your full retirement age, no matter how much you earn.
Also, the benefit amount increases every month that you delay taking Social Security. For example, if you earned around $60,000 per year and started collecting benefits at age 62, your monthly benefit would be $1,146. However, if you wait until age 62 and 9 months, your monthly benefit amount increases to $1,252.
Increased Amount: Claiming at Age 70 versus Full Retirement Age
At your FRA, if you delay taking Social Security benefits, your amount increases. How significant are the increases? Your monthly benefit amount will increase by 8% annually (or 0.67% per month)!
Let’s assume that you are at FRA this year (66 + 4 months) and your monthly benefit amount is $1,614. If you delay until age 70, your benefit amount will permanently increase to $2,244. (Please note that your benefit no longer increases after age 70 – that is your maximum benefit amount.) That’s nice a jump, but, wait, Social Security is a “use it or lose it” benefit. What happens if you get ill or change your mind?
Mulligan! That’s where the Social Security Administration grants you a mulligan or a “do-over.” You can retroactively claim benefits, up to a six-month maximum, between your FRA and age 70. If we use the previous example, what if you became ill or realized that you need the extra cash flow in two years? At age 68 + 4 months, your monthly benefit amount grows to $1,872, but if you file for the six-month retroactive retirement benefit, you will receive a six-month lump sum payment up front, but you lose that extra six months of benefit growth, so your monthly Social Security amount would now be $1,808.
Summary
Deciding when to take Social Security is an important step in your retirement planning strategy and the right time can be different for everyone. It depends on your financial situation, family situation, health, and overall comfort/anxiety level of delaying your benefit. But whenever you decide to take Social Security, it’s nice to know that you can hit the “do-over” button once you have reached full retirement age.
Meredith Carbrey, CFP, is a Senior Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Meredith at mcarbrey@bedelfinancial.com