Why Social Security should be your backup plan in retirement

Claim early only if you really need to; suspend until later if you can afford it

By Mary Beth Franklin

Jul 15, 2015 @ 12:01 am EST

The key to financial planning is to remain flexible and be able to pivot as necessary if situations change. That's what happened to one reader who wrote to me recently about her decision to claim reduced Social Security benefits early at age 62 after she lost her job.

Job loss is an excellent reason to claim Social Security early. If you need the money, take it.

But shortly after Sonya Bell began collecting Social Security benefits four years ago, she found another job in her profession as a registered nurse. Although she only worked part time, her earnings significantly exceeded the annual earnings limit.

In 2015, anyone who is under full retirement age for the entire year and who continues to work while collecting Social Security benefits forfeits $1 in benefits for every $2 earned over $15,720. Essentially that means if you earn $47,160 ($15,720 times three) or more in 2015, you would temporarily forfeit all of your benefits. The earnings cap is increased for inflation each year.

(More: Reality bites when it comes to wages in retirement)

The Social Security Administration urges anyone who is collecting benefits to inform the agency if they return to work before full retirement age so their benefits can be adjusted accordingly.


After you turn 66, a more generous limit applies. In the months leading up to your 66th birthday, you can earn up to $41,880 (or $3,490 per month) in 2015 without losing any benefits. Earn more than that and you would forfeit $1 in benefits for every $3 over the limit.

Once you turn 66, the earnings cap disappears and you can earn any amount without losing any benefits. At full retirement age, Social Security will recalculate your benefits, restoring amounts that were lost to the earnings cap.

Unfortunately, Ms. Bell, who is single, wasn't aware of the earnings restrictions. When Social Security caught up with her two years later, she couldn't afford to repay the more than $33,000 in benefits that Social Security said she was not entitled to due to her excess earnings.

Had Ms. Bell written to me four years ago, I probably would have recommended that she take advantage of the once-in-a-lifetime opportunity to withdraw her application for Social Security benefits as soon as she found another job. You can do that by filing Form 521 within 12 months of first claiming Social Security. Although Ms. Bell would have had to repay any Social Security benefits she had received, it would have wiped the slate clean as if she had never claimed benefits. Later, she could have applied for larger benefits based on her older age.

Ms. Bell said she was frustrated by how difficult it was to find information about Social Security benefits for single people. It seems that most of the articles she read pertained to claiming strategies for married couples, divorced spouses and survivors.


Doing nothing proved to be a costly mistake. Ms. Bell filed for bankruptcy in 2013 and discharged nearly $17,000 of benefit repayments. The Social Security Administration withheld all of her retirement benefits in 2013 to satisfy the rest of her debt. Her benefits were reinstated late last year.

Now that Ms. Bell is approaching her full retirement age, she asked me whether she should suspend her benefits at 66 as a way of increasing her monthly Social Security benefit in the future.

“My job has become fairly secure,” she wrote to me in an email. “Am I able to suspend my benefits now that I am 66?”

Yes, anyone who is already collecting Social Security — including single individuals — can suspend their benefits at 66. They will earn an extra 8% per year for every year they postpone collecting benefits beyond their full retirement age up to age 70, potentially boosting their benefits by 32%. In the future, annual cost-of-living adjustments would be applied to the larger benefit base.

(More: Social Security Administration to same-sex couples: File for benefits now)

Suspending benefits also acts as an insurance policy. Once you suspend your benefits, you have the right to change your mind at any time up to age 70. You can request a lump-sum payout of your suspended benefits — in lieu of earning the 8% delayed retirement credits. Going forward, your monthly benefit would be based on your age 66 amount.

But I cautioned Ms. Bell that given her past financial problems, she may want to continue collecting her benefits and bank the excess income as a way of building up an emergency fund and adding to her retirement savings.

(Questions about Social Security? Find the answers in my ebook.)

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