If you’ve read my book Guide to Social Security…and A Better Retirement you know that postponing Social Security until age 70 makes a great deal of sense for most healthy, married Americans that can do without the income. I mentioned this in my retirement blog in other posts. Of course, there are numerous exceptions and before postponing your benefits you should seek professional guidance. Obviously most haven’t because about two-thirds of current Social Security recipients started taking benefits before their normal retirement age? For the vast majority, this was a mistake and will cost them dearly in retirement as the result will be lower lifetime benefits. Is there a way to reverse this mistake and start again?
Yes! The Social Security Administration allows you to pay back the money you’ve received in Social Security benefits – without interest and without adjustment for inflation – and reapply for higher benefits. All you need to do is complete form 521, “Request for Withdrawal of Application”. You’ll be asked the reason for your action but don’t worry because any answer is acceptable. Let say you started at age 62 and have been drawing $1,000 a month for eights months but now want to reapply. Along with form 521 you’d write a check for $8,000 and then you can reapply when ready. If you filed a tax return during the period, you’ll probably want to file an amended return because chances are you overpaid your taxes and are due to refund. If you wait until age 70 to reapply, your benefits will grow about 8% annually, plus the cost-of-living-adjustments, which means your benefits will more than double from those at age 62. As you’ll learn from reading my Guide to Social Security there are several other good reasons to postpone Social Security if you can possibly afford to do so. In fact, the typical family may be able to add as much as $200,000 to their lifetime retirement income if the primary breadwinner postpones Social Security until age 70.
Let’s look at Fred and Sue, both aged 65. Both worked outside the home and are entitled to $1,500 each in Social Security benefits for the reminder of their lifetime. A quick glance at a Mortality Table shows that Sue is expected to outlive Fred by several years. The Social Security regulations says that one spouse is entitled to what they qualify for based on their own lifetime earnings record or 50% of what the higher earning spouse will receive, whichever is greater. Since Sue is expected to outlive Fred, wouldn’t it be nice if Fred postponed benefits until age 70 so that Sue would get a big raise in Social Security benefits if Fred dies first? Is there a way for Fred to get benefits based on Sue’s lifetime earnings record and then apply at age 70 for higher benefits based on his lifetime earnings record?
Due to a little-known glitch in the Social Security regulations, there is a way. Fred would apply for spousal benefits and receive 50%, or $750, based on Sue’s earnings. He would draw this amount, increased annually for cost of living adjustments, and at age 70 reapply based on his earnings. Presto, he will get substantially higher benefits for postponing and these, too, will be adjusted annually for inflation. At Fred’s death, Sue will be entitled to the greater of the two and her benefits will ratchet up to what Fred was receiving.
The foregoing shows two easy ways to maximize your Social Security benefits by taking advantage of little known glitches in the rules. More and more married couples are realizing that postponing Social Security is the wise move because there is an increasing probability that at least one of them will live well beyond age 90. Since Social Security is a lifetime annuity promised by the U.S. Government with benefits annually adjusted upward for inflation and tax-favored when taken, making them a relative larger part of your retirement income is smart. This is done by postponing until age 70 if possible and taking advantage of the two “loopholes” we’ve discussed. Of course, by using these loopholes you’re adding to the financial woes of the Social Security System. If you find these glitches attractive, act soon before Congress wakes up and closes the gate.
Shelby J. Smith, Ph.D.