Most Americans give little thought regarding when and how to file for social security benefits and the negative impact it could have on their lifetime retirement benefits. Making the wrong filing election could cost tens of thousands or even hundreds of thousands of dollars in missed but eligible benefits.
There are a number of reasons for the lack of social security income planning starting with the sheer complexity of the program. With over 2700 rules governing social security, a typical couple has over 567 possible filing options. How are they supposed to determine which would be their best filing option?
Another, perhaps more common reason for electing a sub-optimal filing strategy is that many people have pre-conceived ideas regarding the best time file. Often, these notions are not based any detailed analysis of benefit options but rather are determined through discussions with various family members, friends, colleagues at work or other sources who are not qualified experts in social security planning.
So what's the big deal anyway. Does it really matter when you file? Well, if maximizing your lifetime social security retirement income is important to you then yes it sure does matter.
For example, assume a couple had both earned income at the maximum social security wage base level throughout their 35 years of employment. If they had applied for benefits at age 62 then their expected lifetime benefits would be about $1.2 million. If instead they had delayed filing until age 70 (and also used some little known enhanced filing strategies) their lifetime benefits would be approximately $1.6 million. That's an additional $400,000 in lifetime benefits!
But what if you have already filed for your benefits? Do you have any options to change your filing election? Generally speaking, the answer is no. Your filing election is all but permanent. However, here are a couple of possible remedies.
One strategy is called "The Do-Over". If less than 12 months have passed since you filed, you are allowed to pay back all the social security benefits that you received to date and social security will undo your election as if you had never filed. If other auxiliary beneficiaries (eg. spousal or child beneficiaries) also received benefits as a result of your filing, then they too must pay back any benefits received. Note, you are only permitted one "Do-Over" but it may allow you to change to a new filing strategy that will provide you with thousands of dollars of additional benefits in retirement.
But what if 12 months has already passed since you filed for benefits, do you have any other options? There may be one other possible option for you to consider. If you, for example, filed at age 62 (taking a 25% reduction in benefits as compared with to your age 66 benefit) then, once you reach full retirement age (66 for most filers) you are eligible to "suspend" your benefits. If you suspended payments from age 66 to 70, your benefit amount will increase by 8% per year (guaranteed!) plus any cost of living adjustments declared by social security. That means your benefit amount could increase by 32% plus cost of living adjustments by your age 70. It's important to note, however, that you are not allowed to suspend benefits prior to full retirement age.
Given the limited options available to filers to change their filing options once they have made them, it is critical that they review as many possible filing options "before" locking themselves into one. One's haste to start collecting social security benefits may result in the permanent loss of thousands of dollars in eligible benefits.
Ash Ahluwalia, NSSA, CCSCA, MBA