Social Security is a complex program that must serve the needs of 70 million Americans with a diverse range of circumstances. There's no way anyone could construct a program that big without a lot of detailed planning and intricate rules.
While many households rely on Social Security to make ends meet in old age and retirement, they may be missing out if they don't know some of its lesser-known rules. Among the details of the program, here are three things you might not be aware of -- rules that could completely change your Social Security strategy.
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1. You can undo your Social Security claim
If it's been less than 12 months since your benefits were approved, you have an opportunity to withdraw your application. This can be incredibly useful for anyone who ends up going back to work within a year of their initial claim or learns they made an error in their claiming strategy.
There is a catch, though. You have to repay the money you and your family received, including any amount withheld to pay for Medicare premiums and taxes, if applicable.
That may be a tall order, especially for anyone who needed Social Security income to get by before finding work again. But if you can manage to get the money together in time, you can roll back the clock as if you never claimed Social Security in the first place. That way, your benefit will continue to grow (up to age 70), and you can reevaluate the optimal timing of your claim.
2. There's another option to delay your benefits
If it's been longer than 12 months since your benefits were approved or you can't pay back the money you've received, there's yet another option. You can suspend your benefits once you've reached full retirement age.
You won't have to pay back any of the benefits you've received, and you'll start earning delayed retirement credits from the month your benefits are suspended (again up to age 70). Delayed retirement credits add two-thirds of a percentage point to your monthly benefits check for every month you delay, so they can add up to quite a bit over time. So, if you suspend your benefits right at age 67 and wait until they max out at 70, you'll add 24% to your monthly benefits check. At age 70, your benefits will automatically start up again.
Suspending your benefit can be a great option for anyone who goes back to work or finds their retirement savings have grown to a point where they can afford not to supplement their income with Social Security for a few years. The resulting delayed retirement credits can make a big difference in your 70s and 80s.
3. The government will automatically delay your benefits if you earn too much
If you work while collecting Social Security, your benefit may be subject to a little-known rule called the retirement earnings test.
The retirement earnings test applies to anyone collecting Social Security before their full retirement age who also has earned income from wages or self-employment. If you earn above a set threshold (adjusted for inflation every year), the Social Security Administration will reduce your monthly benefit. For 2024, the threshold is $22,320 per year, and for every $2 you earn above that threshold, the Social Security Administration reduces your monthly benefit by $1.
If you reach full retirement age this year, the threshold rises to $59,520, and you only lose $1 of benefits for every $3 earned above that number.
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While this might sound like a penalty, it can actually work in your favor if you aim to delay benefits upon returning to work. That's because the program will recalculate your monthly benefit at full retirement age based on how much it withheld due to the earnings test. Each month's worth of benefits withheld is treated as if you delayed claiming Social Security for one month longer than you actually did.
For example, let's say your Social Security benefit would have been $1,000 per month, but the program withheld $1,000 in total benefits this year due to the earnings test. As a result, the Social Security Administration will treat this withholding as if you delayed taking benefits for one month, and it will increase your benefit to account for the one-month delay once you reach full retirement age.
If you reach full retirement age and you want to continue delaying your benefit, you can completely suspend your benefit at that point until age 70. That way, you can offset much of the impact of claiming early to help optimize your finances long-term.
Understanding these lesser-known Social Security rules can help you make the most out of Social Security. If you find yourself in a situation where you might want to claim benefits early, be sure to understand the long-term implications of your decision. You may be able to improve your present standing while planning for the future.
