Claiming Social Security early without a penalty

social-security-application-formEveryone knows you can’t have your cake and eat it too. But when it comes to Social Security retirement benefits, maybe you can. Current Social Security rules allow you to apply for benefits early without taking a financial hit.

Many financial advisors recommend waiting until at least full retirement age to start taking Social Security benefits. Certainly this makes sense from a financial standpoint – each year you take benefits early reduces your benefit by 8%, permanently.

What if you decided to take benefits early anyway, but later changed your mind? Maybe you took benefits early because you lost your job, but then found another one. Or your circumstances changed and you no longer need the income right away. There are a few options.

Within the first 12 months after claiming for benefits, you can submit a form SSA-521, “Request for Withdrawal of Application”. You will be required to return all the benefits you received, including spousal benefits. But that resets the clock and your benefits continue to accrue as though you hadn’t filed. In the future, you can claim benefits again, at a higher amount. Note that you can only withdraw your application once, and only in the first 12 months after you first apply.

Another penalty applies if you’re working and below full retirement age when you apply for benefits. If you’re still working and below full retirement age when you claim Social Security, your benefit is reduced if your income exceeds a certain limit. This is the so-called “earnings test.” In 2015 the limit was $15,720. If your income exceeds that limit and you are under full retirement age for the entire year, your benefit is reduced by $1 for every $2 that your income is above the limit. Yes, this means that you might not receive any benefits in some months, depending on your income. The Social Security Administration (SSA) has an earnings test calculator to let you see how your earnings could affect your retirement benefits.

The good news is that this reduction is temporary. When you reach full retirement age, the SSA recalculates your benefit and credits you back the time in which you didn’t receive any benefits. For example, suppose you claim benefits four years below retirement age, but didn’t receive benefits for one year because of the earnings test. At full retirement age, the SSA recalculates your benefits as though you had applied three years early instead of four.

Furthermore, if you will be retired for part of the year, a special rule allows you to receive full benefits for each month you’re retired. If your income is below a certain threshold, which was $1,310 in 2015, your benefit is not reduced under the earnings test even if your income was above the limit described in the previous paragraph.

Deciding when to apply for Social Security retirement benefits is a highly individual decision. You might want to consult the SSA website, other reliable financial sources, and appropriate advisors when making a decision. But this article has shown that you do have some flexibility in how you claim benefits. If you need the income now, then applying early might be the right choice, as long as you can accept that your payments will be much lower than if you waited.  But in many cases, waiting to full retirement age can save you significant financial penalties, not to mention time and frustration.