6 Social Security Withdrawal Strategies Everyone Should Know
Life offers a lot of chances for do-overs. Marry the wrong person? File some papers and you're free to take as many trips down the aisle as your heart desires. Didn't get the dramatic lift you wanted from your plastic surgeon? After the swelling subsides, just make another appointment... and then another, and another, and another.
But when it comes to pulling the trigger on taking Social Security benefits, you get one chance to take back what you did and do it over sometime in the future. And even then, you've got to make sure you don't miss the narrow window of opportunity.
As the Social Security Administration rules state, if you have second thoughts about taking benefits after you apply, you can withdraw your claim and reapply later on but you've got only 12 months or less to change your mind, you'll have to repay all of the benefits you received, and you're allowed one single do-over during your lifetime.
Get your Social Security benefits claim right the first time
Being strategic about claiming your Social Security benefits can have a huge impact on your retirement quality of life, so it pays (literally) to know your options before you use up your do-over.
Here are six strategies to help you decide when to apply to get the maximum value from your benefits.
The "take it ASAP and keep working" strategy: According to the Social Security Administration's official rules, you can start receiving benefits as early as age 62. This is a good option for those who need that influx of cash earlier in their retirement or want to keep their other money in tax-favored accounts for longer so that their retirement investments continue to grow as long as possible.
However, if you plan on tapping your Social Security income early and then supplementing it with income from another job, your benefits could be reduced depending on how much bacon you bring home.
Using the "retirement earnings test," the SSA will look to see if what you earn exceeds a certain limit and then lower the amount in your Social Security check accordingly. In 2015 the earnings limit is $15,720, and every $2 you make over that amount reduces your benefit by $1. This doesn't go on forever, though, and eventually when you reach normal retirement age, the earnings cap goes up to $41,880, and every $3 you earn reduces your benefits by $1.
That said, by working you are continuing to accrue credit for your annual wages (which might actually boost your future benefit and once you reach full retirement age), and the benefit reductions you were required to pay will come back your way.
The "wait for it" strategy: Though it's tempting start claiming your due from Uncle Sam the moment you officially retire, you might want to hold your horses for a few years. The benefit of doing so is a bigger payday.
For example, not factoring in inflation (reflected in the cost-of-living adjustments that increases Social Security benefits), a 62-year-old receiving a $750 benefit today could boost their monthly payment to $1,000 by waiting until age 66 to claim benefits. Hang in there until age 70, and, your paycheck grows substantially:
Source: Social Security Administration
The drawback of going with this strategy is death...as in, the longer you wait to start claiming your Social Security benefits, the fewer paychecks you'll likely collect before you (ahem) permanently retire. Still, if you can wait to start claiming Social Security benefits and you have a family history of longevity, the payoff can really be worthwhile.
The "you go first" strategy (or the "filing as a spouse first" strategy): For couples, coordinating benefits to maximize your lifetime payments is complex. It's important to know the rules -- an important one is that if a spouse wants to claim Social Security benefits based on their spouse's work history, they must wait until the spouse has filed for retirement benefits. Ah, but there's a workaround...
The "file and suspend" strategy: So you want/need to start claiming spousal benefits but your honey doesn't need the income now (or wants to max out their benefits by delaying them for a number of years). Here's the workaround: Your spouse (who qualifies for higher Social Security benefits than you) reaches full retirement age and files for benefits. By doing so, you get to start claiming your spousal benefits. Then he or she immediately suspends the application for those benefits. You still get paid spousal benefits while they put theirs on hold. And, bonus time: When your spouse reactivates their benefits (they have to do so by age 70), the delayed-retirement credits will increase their monthly payments.
The "don't get married again after age 60" strategy: Here's one for spouses (or exes) receiving Social Security benefits based on a deceased spouse's income. (Or, in more blunt terms: This is a rule you should know if you were married to or divorced from someone who died and you are eligible for spousal benefits.) There are a lot of factors that affect Social Security spousal benefits, but here's a particularly important rule for anyone who had a May-December romance where Mr. or Ms. December died before you: If you remarry before age 60, you won't be able to claim your late ex's benefits. And if you're divorced and your ex is as healthy as an ox?: As long as you were married for 10 years or more and haven't taken another trip down the aisle, you're eligible for spousal benefits...even if your ex remarries. And here's a little something extra to add a silver lining to your breakup: You don't even have to wait for your ex to file for benefits in order to claim your spousal rights, as long as they are eligible for benefits.
The "move to avoid paying Social Security income taxes" strategy: So, this one's not exactly that practical, but if you live in one of the 13 states that tax your Social Security income and are open to packing up the homestead and moving, consider adding "state tax laws" to your comparison list. The states of Minnesota, Nebraska, North Dakota, Rhode Island, Vermont, and West Virginia tax Social Security income without exemptions. Colorado, Connecticut, Kansas, Missouri, Montana, New Mexico and Utah have their own set of rules based on age and income to guide what taxpayers have to include on their state tax returns. For residents of these states it's important to know how much of Social Security benefits check you may have to give up in order to stay put.
The article 6 Social Security Withdrawal Strategies Everyone Should Know originally appeared on Fool.com.
Try any of our newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.