Ask Liz Weston

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Social Security

Q&A: A tricky Social Security plan

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Dear Liz: In a recent column, you described the difference between withdrawal and suspension of Social Security benefits. I am 64 and want to take Social Security for two months to get out from under a few one-time bills. I’ll then withdraw my application and pay back the money. Do I understand that I’d have 12 months to pay back the funds? Is this something that can be done every 12 months? I see it as an interest-free short-term loan. Of course this only works if the money is paid back.

Answer: The answer to both your questions is no. You’re allowed to withdraw an application only once, and it must be in the 12 months after you start benefits. Once you submit your withdrawal request, you have 60 days to change your mind. If you decide to proceed, you must pay back all the money you’ve received from the Social Security Administration, including any other benefits based on your work record such as spousal or child benefits, plus any money that was withheld to pay Medicare premiums or taxes. In other words, you have a two-month window to pay back the funds, not 12 months.

If you can’t come up with the cash, you’d be stuck with a permanently reduced benefit. You could later opt to suspend your benefit once you’ve reached your full retirement age, which is between 66 and 67. (If you were born in 1956, it’s 66 years and four months.) At that point, your reduced benefit could earn delayed retirement credits that could increase your checks by 8% for each year until the amount maxes out at age 70.

There are a few situations in which starting early and then suspending can make sound financial sense, but a short-term cash need is not typically one of them.

Q&A: When to claim a survivor benefit

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Dear Liz: As a widower who just turned 60, what are the pros and cons of starting my survivor benefit now? My wife passed away at 55, after 20 years of marriage. My lifetime earnings are higher than hers. I am in good health and have not remarried (though I’m open to doing so). Finances are not an issue. I’m debating how long to continue to work. It seems my best Social Security approach is to claim the survivor benefit now, then later (perhaps at age 67 or 70) claim my own benefit. Your thoughts, please?

Answer: If you start any Social Security benefit before your own full retirement age, you will be subject to the earnings test that reduces your checks by $1 for every $2 you earn over a certain limit ($18,240 in 2020). So if you continue to work, it’s often best to delay starting benefits.

Your full retirement age is 66 years and 10 months if you were born in 1959. (It’s 67 for people born in 1960 and later.) Once you reach full retirement age, the earnings test disappears. You could collect the survivor benefit and leave your own alone to grow. Once your benefit maxes out at age 70, you could switch.

Q&A:Getting bum info from Social Security

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Dear Liz: After taking Social Security early at 62, I have called, written and visited in person asking to have my benefit suspended so it can earn delayed retirement credits. Nothing has worked. Social Security representatives say I cannot change anything after the first 12 months.

I turn 66 this month and wanted to get this done.

Answer: The employees you’re talking to are confusing benefit suspension with application withdrawal.

As you know, Social Security benefits grow by 5% to 8% each year you delay between 62 and 70. Starting early can be an expensive mistake that permanently reduces the amount you receive over your lifetime.

There are two potential ways to fix the mistake. One is a withdrawal, where you rescind your application and pay back the money you’ve received. Withdrawals are a “do over” that resets the clock entirely on your benefit so that it’s as if you never applied. Withdrawals are only allowed in the first 12 months after your application.

A suspension, on the other hand, is when you ask Social Security to halt your benefit so that it can earn delayed retirement credits. You don’t have to pay any money back, but you also don’t get to reset the clock. Instead, the benefit you’re currently receiving is allowed to earn delayed retirement credits. You can only suspend your benefit once you’ve reached full retirement age. If you were born between 1943 and 1954, your full retirement age is 66.

Social Security explains how suspension works online in the retirement section. You might want to print that out and take it with you to the Social Security office. If someone again tries to tell you that suspension isn’t allowed, ask to speak to a manager. This is your right, and it could make a big difference in providing you a more comfortable retirement.

Q&A: Social Security for a child

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Dear Liz: I will be 65 next year and have an 8-year-old son. I have been told by various people that I can receive an extra Social Security allowance for him until he is 18. These same people also said it would reduce my benefit permanently. Is that correct?

Answer: Yes, plus your benefit would be subject to the Social Security earnings test if you continue to work. The earnings test applies when you start Social Security before your full retirement age, which is 66 and 2 months, and could temporarily reduce or even eliminate your benefit.

The earnings test disappears at full retirement age, which is why it’s usually good to wait until then to apply if you continue to work. Most people benefit from delaying the start of Social Security even longer, but your situation may be one of the exceptions because the child benefit can be a valuable, if temporary, addition to the family finances.

A child can receive up to half the parent’s full retirement benefit, typically until the child turns 18. (Benefits can continue as late as age 19 if the child is still in high school.) The parent must apply for his or her own benefit to trigger a child benefit. Also, there’s a limit to how much a family can receive based on one worker’s earnings record. This family maximum varies but can be from 150% to 180% of the parent’s full benefit amount.

Free Social Security claiming calculators typically aren’t set up to handle the possibility of child benefits, so you may want to use one of the paid versions such as Maximize My Social Security or Social Security Solutions to determine your best course.

Q&A: Don’t rush to collect Social Security

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Dear Liz: I would like you to explain to us retirees why we should delay taking Social Security.

I have two tax preparers — and other people — who say delaying is a terrible idea. I’m in my 20th year of collecting Social Security, and I can assure you that people who delay are making a dreadful mistake. Please check this out!

Answer: Your tax preparers may have had a point 20 years ago, but a lot has changed since then, including life expectancies and prevailing interest rates. It’s unfortunate if your advisors haven’t kept up with copious research showing that delaying Social Security makes sense for most recipients.

One issue of particular interest to tax pros is the “tax torpedo.” That’s a sharp rise and then fall in the marginal tax rate caused by taxation of Social Security benefits. Researchers found the tax torpedo could nearly double the marginal tax rate for many middle-income families. People in the 22% federal tax bracket, for example, could see their marginal tax rate jump to 40% on a portion of their income.

Two decades ago, this would have been an issue for fewer taxpayers because most did not owe income tax on their Social Security benefits. Now more than half pay taxes on their benefits because Congress hasn’t updated certain income limits to reflect inflation.

The researchers found that delaying the start of benefits until age 70 and tapping retirement funds instead could reduce the tax torpedo’s effect. This approach not only maximizes Social Security benefits but also reduces the minimum amounts that must be distributed starting at age 70½. For more details, you can point your tax advisors to the July 2018 issue of the Journal of Financial Planning.

The National Bureau of Economic Research also has numerous papers on Social Security-claiming strategies, including “Recent Changes in the Gains from Delaying Social Security,” “Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security,” “The Power of Working Longer” and “The Decision to Delay Social Security Benefits: Theory and Evidence.”

Q&A: Don’t fall for these common Social Security misconceptions

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Dear Liz: I decided to start taking Social Security benefits this summer when I turned 62. My monthly benefit is $1,809. My wife turned 62 at the end of last year and started her benefit of $841 a month. I just accepted an unexpected job offer that will pay me more than $130,000 a year. I suspect I should consider suspending my benefit at this point and work as many years with this company as possible. If I choose to suspend my benefits now and allow my benefits to remain suspended until my full retirement age of 66 years six months, I will pass up benefits of $112,000 over the next 4.5 years. Granted that amount will be overshadowed by the additional new income and the opportunity to contribute to a 401(k), but is it out of the question to continue my current benefit and just pay the 85% tax on the Social Security we receive each year in addition to our other income?

Answer: Social Security is complicated, so it’s not surprising that so many people get the details wrong. Unfortunately, those details can have a huge effect on financial well-being in retirement. The difference between the best claiming decisions and the worst can total more than $250,000, researchers have found.

Let’s start with the detail you need most: You don’t have the option right now of suspending your benefit. Only people who have reached their full retirement age can suspend. You can, however, withdraw an application within the first 12 months. You will have to pay back all the money you’ve received from Social Security, but then it will be as if you’d never applied. Your benefit can continue to grow by 5% to 8% each year until you restart your benefits or turn 70, whichever comes first.

Withdrawing your application is a good idea because otherwise your new job will offset all of your Social Security benefit.

Because you started Social Security early, you are subject to the earnings test and your benefit will be reduced by $1 for every $2 you earn over a certain limit, which in 2020 is $18,240. Your six-figure income would reduce your benefit to zero.

This earnings test disappears at full retirement age, and any money that was withheld because of it is added back into your benefit over time. In the meantime, however, you’ve given up the more valuable 5% to 8% growth in your benefit and reduced your survivor benefit as well.

Social Security taxation also works differently than what you’ve described. You never have to pay taxes equal to 85% of your benefit. If your income exceeds certain levels, then up to 85% of your benefit could be subject to taxation. (To illustrate, that means if you’re in the 10% federal tax bracket, you’d pay 10% on up to 85% of your benefit. It’s more complicated than that, but that may help you understand the difference between losing a huge chunk of your benefit and having to pay tax on a portion of it.)

Given all these complexities, it’s important for people to use a few Social Security claiming calculators before applying. Ideally, they also would consult a financial planner who’s been educated on Social Security claiming strategies.