Life rarely works out as we plan it to, which makes retirement planning tricky.
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Take these two examples, and note the important differences in these two scenarios. (Hint: The individual's age is key)
A) At age 62, you were laid off because of the lousy economy, could not find another job and needed income. So you filed for Social Security, taking a 25% cut in your benefit because you started four years “early.” As luck would have it, 13 months later you were hired by another company, and now you’d like to stop receiving your monthly Social Security check because you’re thinking this might result in a bigger benefit when you re-start it in the future. Is this possible?
B) You retired at age 64 and started receiving Social Security. You signed up for Medicare when you turned 65. A year later you (pick one): a) have re-married someone who is independently wealthy, or b) return to the workforce as a senior advisor to Mark Zuckerberg. In either case, you no longer need the income from Social Security to cover your current living expenses. In addition, you’ve learned about something called the “Delayed Retirement Credit” (DRC), which could significantly increase your benefit. However, you’ve been receiving Social Security for two years; is it possible to “turn off” your benefits for a few years? Would you still be eligible for DRCs?
The answer to “A” is no, you cannot stop receiving benefits right now. If you are under full retirement age (FRA) and wish to stop receiving Social Security, you have to complete the process of “withdrawing” your application within 12 months of getting your first check. In this example, you waited too long. For more on what’s required to stop Social Security prior to full retirement age (currently 66), see last week’s column. However, assuming your FRA is 66, you will have an opportunity to turn off your benefit in three years. (See below.)
The answer to “B” is Yes: No matter what age you started receiving benefits, once you reach full retirement age you can ask Social Security to stop sending you a check. This process is called “suspending” your benefit and has its own unique requirements:
1. You must be at least full retirement age. This is 66 for anyone born from 1943-1954 and it gradually increases to age 67 starting with those born in 1955 or later;
2. You cannot be 70 or older;
3. You can request your benefits be suspended either verbally or by sending a letter to your local Social Security office;
4. Your benefit will automatically resume when you turn 70 or you can request that it be re-started sooner.
The ability to “suspend” your Social Security benefit is relatively new. It was signed into law by President Bill Clinton as part of the Senior Citizens Freedom to Work Act of 2000 which also eliminated the “earnings test” for individuals who are at least full retirement age. These changes were designed to encourage older Americans to continue to participate in the workforce. In Clinton’s words, “…it will mean more baby boomers working longer, contributing more to the tax base and to the Social Security trust fund at precisely the time when the percentage of younger workers paying into the system will be dropping.”
Because of the aforementioned “delayed retirement credit,” it can make a lot of sense to stop receiving Social Security if you are at least FRA and don’t need the money. Think of the DRC as a bonus the government pays you for delaying or suspending your benefit and, thus, saving Social Security money. Each year beyond full retirement age that you do not receive a check, your benefit increases by 8%.(1)
Let’s assume the circumstances in example B. Because you filed for Social Security two years before FRA, your benefit is reduced by 20%. If your benefit at age 66 would have been $1,000, you will receive $800 per month if you start at age 64. This reduction is permanent.
Now let’s say that over the next four years annual cost-of-living increases run 2%. As a result, by age 66 your benefit has grown to $832 per month. (2)
But wait! Thanks to (pick one): a) your incredibly wealthy new spouse, or b) your new gig at Facebook, you don’t need this money right now. And, since you are FRA, you have the option to ask Social Security to suspend your benefits. This means that your current benefit amount will begin to receive delayed retirement credits.
Thus, each year you delay receiving your benefit it will go up roughly $67 per month ($832 x 8%). By the time you turn 70 -- a four-year suspension -- your monthly benefit will have increased by $266 to $1,098 per month. But this doesn’t include the cost-of-living adjustments that Social Security beneficiaries received over the past four years. So in all likelihood, it will be higher.
If your spouse was receiving a benefit based upon your earnings, s/he will continue to receive this even though your own benefit is suspended.
However, if you personally receive Supplemental Security Income (SSI) in addition to your regular Social Security benefit, payment of this amount will also stop when your benefit it suspended.
Important: If Medicare premiums are being deducted from your Social Security check, once you suspend your benefit, you will have to pay Medicare each month yourself. Since there are serious consequences for making a late payment or missing a premium you might want to play it safe and set up an automatic deduction from your checking account.
1. The calculation is one of simple, not compound, interest.
2. Assuming Social Security recipients receive cost-of-living increases over this period, your benefit will be greater than this.