Retirement planning: How to maximize your social security benefits

Retirement planning involves deciding what to do with your Social Security benefits: should you take them out early, or suspend them until reaching full retirement age? Luckily, there is a lot of flexibility in terms of how to handle Social Security in retirement planning. 

In a recent article, The Social Security “Reset”, I talked about how to partially undo the benefit reduction that results from taking early Social Security retirement benefits.  I pointed out that the rules allow a recipient to suspend retirement benefits upon reaching full retirement age (FRA) in order to earn delayed credits at 8% per year up to age 70.  I further showed how suspending benefits at FRA and then waiting until age 70 to restart them allows a recipient to in effect “reset” the benefit back to  99% of the amount they were originally entitled to receive at full retirement age (commonly called the Primary Insurance Amount, or PIA) but for the decision to begin taking benefits early.

After publishing this article I received follow up questions and comments from readers that I felt merited an update of my original article.  The following points are in response to reader feedback and are meant to elaborate further on this Social Security retirement planning opportunity.

Sorry, You Can’t Do That

One of my readers contacted me to report that she had called her local Social Security office to suspend her retirement benefits but was told by a representative that this was not allowed.  This rep mentioned that the only avenue for stopping benefits was a one-time payback option available to new claimants whereby all benefits received within the first 12 months of starting benefits are paid back.  In exchange, the claimant is treated as if they never began receiving benefits and can therefore defer them to avoid a reduction (if before FRA) or to earn delayed credits (if after FRA).  This reader had begun taking her benefit at age 62 and was now at FRA so she was not seeking this payback option.

I advised this reader to call Social Security back and do two things.  First, I advised her to clearly state that she was looking to “defer retirement benefits to earn delayed credits.”  If that did not do the trick, I advised to her cite the Social Security Administration’s own sources:  the SSA website and the SSA procedures manual, known as POMS. Both of these citations clearly state that suspending benefits at FRA is allowed in order to earn delayed credits.

Sure enough, upon calling Social Security back my reader initially met with the same rejection she had experienced earlier. But upon providing the rep with the above citations, she was finally able to get him to concede that suspension was, in fact, allowed.

This reader’s experience points out the fact that sometimes even Social Security personnel are not up to speed on program rules and the options they present to beneficiaries.  It is therefore important to be prepared to stand your ground when pursuing these opportunities and be able to substantiate your position by referring to specific Social Security regulations.

The Restart Safety Valve

Another important aspect of the suspension option is that it is possible at any time before age 70 to restart benefits should an emergency or change in circumstance require doing so.  On restarting, beneficiaries can request that all suspended benefits be paid out to them in a lump sum.  In exchange for this payout, the beneficiary gives up all delayed credits earned to that point and is put back in the same position they were in before suspending benefits.  Beneficiaries can also opt to forgo reimbursement of suspended benefits to date and retain delayed credits earned to that point.  Of course, no further delayed credits will be earned in either case once benefits are restarted.

This ability to restart benefits at any time should provide beneficiaries considering the suspension option with important peace of mind.  This safety valve effectively makes the decision to suspend risk-free, even if unexpected circumstances later arise requiring access to the suspended income.

Medicare

For beneficiaries currently receiving Medicare at the time they suspend Social Security retirement benefits, it is important to note that they will need to begin making Medicare Part B premium payments directly since suspension of benefits means this premium can no longer be withheld from Social Security payments.

Medicare premium withholding can restart when Social Security benefits resume.

Take Early and Invest

Some readers wondered whether it made more sense to continue receiving early benefits and investing them rather than suspending in order to earn delayed credits, particularly for beneficiaries who had sufficient additional sources of income to meet their needs.

Unlike investments, which by their nature involve the undertaking of risk, Social Security benefits are guaranteed. In addition, these benefits receive automatic cost of living adjustments to keep up with inflation.  Given today’s low yield environment, there are no short term, risk-free investments paying enough interest to offset inflation.  Remember also that suspended benefits earn guaranteed 8% credits each year until age 70.  While these credits are not compounded they still represent a significant return which is unmatched by any other investment on a risk-adjusted basis.

One should therefore think twice about whether it makes sense to convert risk-free Social Security benefits into risky investments, even if the income is not currently needed.  For more about this issue and the effective investment return on delayed Social Security benefits, read this article.

I hope these additional points further clarify this key Social Security planning opportunity.  Thank you for your great feedback. Keep it coming.

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