They say you can't fix the past, but when it comes to Social Security, sometimes you can.
Granted, it used to be easier. Until December 2010, if clients had begun collecting benefits at 62 and then decided it was a mistake, they could fix it by simply repaying all the benefits already received, even if it was six or seven years later. Filers didn't even have to pay interest on all the money they'd received -- a situation that had some advisors actually recommending this as an interest-free loan strategy. But Congress eventually closed the loophole.
Now, a client who retires and claims benefits at 62 can still reverse that decision within 12 months, repaying the benefits received without penalty and then waiting longer in order to get higher benefits. But after 12 months, this is no longer allowed.
The 12-month window is good news, though, because as Alicia Munnell, director of the Boston College Center for Retirement Research, notes, while many of those who file early may have to if they have no savings and no other source of income, many others, including clients who may come to see you, simply filed at 62 because they mistakenly think "if you retire from your job you should file for your benefits."
Munnell argues that can be a costly mistake for those who have other options -- whether it's working longer or tapping savings. Waiting until the so-called "full retirement age" of 66 (for those born before 1960), will increase one's benefits by a third. In other words, someone who would only receive $750 a month at age 62 would get $1,000 per month for life by waiting until age 66 to file. Waiting another four years to the maximum age of 70 for filing would add another 8% per annum to that amount, bringing the benefit in that example to $1,320 a month in constant dollars.
UNDOING FILE & SUSPEND
But there are several other situations where Social Security allows a redo.
One involves the "file-and-suspend" option. This is where a married couple with two earners opts to have one spouse, usually the higher earner, file for benefits at full retirement age but then suspend those benefits until age 70. This move allows the other spouse to start collecting spousal benefits on the first spouse's account, while leaving his or her own account to continue growing untouched until age 70, when the benefit is maximized.
But if the person who filed and suspended has a change in circumstances -- say a case of terminal cancer or sudden unanticipated expenses -- they can still make changes. In that event, the person can cancel the file-and-suspend and Social Security will pay out all the foregone benefits as a lump sum, calculated at the benefit level the individual would have received them beginning at age 66 (there would be no interest paid). Of course, going forward, this person would receive benefits based on her or his age at the time the file-and-suspend was cancelled.
REDOING SPOUSAL BENEFITS
Another area where a client can redo a Social Security decision is spousal benefits. The spousal benefit, for someone who begins taking it at 66, is 50% of what the spouse whose account is used is receiving. For example, if a husband at 66 is eligible for $2,000 per month and files and suspends benefits, his wife, also 66, could start collecting a spousal benefit of $1,000.
But say the wife was already eligible to receive $1,500 on her own account by that time and was just leaving that untouched to let it grow to the age 70 level. A year later, the couple might decide they need that extra money to live on, which by then would be 8% higher, or $1,620 per month. At that point, or at any time before reaching 70, the wife could simply cancel her spousal benefit and switch over to her own account.
Finally, for those who've married and divorced more than once, there is the option of changing which ex's account to collect benefits on. Say a single woman was married for 12 years to one man, and for 15 years to another. She could collect benefits on the first spouse's account, if he was already 66, but later, if it turns out the other spouse had waited until 70 to start receiving benefits, she could switch to that spouse's account for her spousal benefits. The same would apply to survivor benefits if one or both of those exes was deceased.
Dave Lindorff spent five years as a China correspondent for Businessweek, and has written for The Nation and Salon.com.
This story is part of a 30-day series on Social Security and retirement income strategies.