Many current retirees decided to begin taking Social Security retirement benefits well before their full retirement age (FRA). The FRA is the age at which a beneficiary is entitled to receive a full Social Security retirement benefit based on their lifetime earnings record.
In some cases, the need for income drove the decision to take early benefits; in others, fear about the long term viability of the program was the impetus. In many cases, the decision was based simply on the fact that the retiree did not know she had the option to delay benefits until the future and decided to take them immediately upon becoming eligible.
Regardless of the reason, the consequences of taking early Social Security benefits are significant and ongoing. Assuming an FRA of 66 (the FRA for anyone born between 1943 and 1954), taking retirement benefits starting at age 62 (the earliest age allowed) results in a permanent 25% reduction in benefits. In other words, if the FRA benefit (known as the PIA amount) was expected to be $2,000/month, beginning benefits at age 62 reduces this to $1,500/month. This reduction is permanent and results in a growing shortfall over time because Social Security benefits are indexed for inflation. Given that retirement benefits do not end until the recipient dies, this shortfall can add up to thousands of dollars in lost lifetime income depending on the recipient’s longevity.
So what can one do if they later regret their decision to take early benefits or their circumstances change such that they no longer need the early income? It turns out that there is a way to mitigate this decision after the fact via a “reset” allowed under the Social Security rules. Let’s discuss this process in detail.
Unknown to most retirees, Social Security allows one upon reaching FRA to stop receiving benefits until some time in the future. This ability to suspend benefits is only available after FRA. Further, under the program rules, delayed benefits after FRA are entitled to receive credits of 8% per year up to age 70. Beneficiaries whose FRA is 66 and who delay benefits until they reach age 70 can therefore receive delayed credits totaling up to 32%.
Let’s take a look at an illustrative example. Jean is a retiree who began her benefit at age 62. Her PIA is $2,000 and was reduced to $1,500 as a result of her decision to take an early benefit. Her FRA is 66. Upon reaching her FRA, Jean decides to suspend her benefit to age 70. This benefit will earn delayed credits at a rate of 8%/year. When Jean resumes taking her benefit at age 70, it will have recovered 99% of the original PIA (0.75 x 1.32 = 0.99) and she will receive $1,980, indexed for inflation. This benefit will continue for the rest of her life and enjoy inflation adjustments throughout.
It is true that Jean would have been better off had she delayed taking her benefit until age 70, thereby increasing it to $2,640 (indexed for inflation) due to delayed credits ($2,000 x 1.32 = $2,640). Still, by suspending, Jean has considerably improved her situation and effectively undone most of the effects of her prior decision to take an early benefit.
This ability to suspend benefits at FRA represents, in effect, a “reset” opportunity for Social Security beneficiaries who later wish to at least partially undo the impact of having taken early benefits. Retirees in this situation are well-advised to consider taking advantage of this key planning opportunity. The result could be significantly more income available to help meet spending needs throughout retirement. Indeed, all retirees would do well to manage Social Security as a form of “longevity insurance” given that this income keeps pace with inflation and lasts for a lifetime. Doing so could be one of the best financial moves they will ever make.
Originally published on NerdWallet’s Advisor Voices