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For most retirees, Social Security doesn’t just provide a check. The income they receive each month is a financial base in charge of helping them reach the end of the month. According to 22 years of polling by the national pollster Gallup, between 80% and 90% of retired workers (at the time of each survey) relied on their pay in some way to cover their expenses.
The same is almost certain to happen to future generations of retired workers. Since 2001, Gallup has found that between 76% and 88% of non-retirees expect to count on their Social Security check as a “major” or “minor” source of income in retirement. This means that getting the most out of Social Security is increasingly important for future retirees, which currently puts baby boomers (people born between 1946 and 1964) in the spotlight.
“Getting the most out of Social Security” means understanding how you get paid, as well as knowing the details and outputs associated with your claim decision.
Image source: Getty Images.
Maximizing your Social Security benefits means understanding how you get paid
There are a number of factors that can affect how much of your Social Security benefit you will be able to keep. For example, early filers may be subject to the retirement income test, while beneficiaries earning above preset income thresholds may have their benefits taxed at the federal and/or state level.
But when you boil it down to the basics, there are four components that determine how much Social Security will pay you as a retired worker, assuming you’ve earned the necessary 40 lifetime work credits.
The first two items go together: your employment history and your income history. The Social Security Administration (SSA) takes into account your highest 35 years of inflation-adjusted earnings when determining your monthly benefit. While it’s important to earn as much as you can in the years you work, it’s also imperative to work at least 35 years to avoid SSA averaging $0 for every year you work less than 35.
The third factor used to determine your Social Security benefit is your full retirement age. This is the age at which you are eligible to receive your full payment (100%) and is determined entirely by your year of birth. According to the retirement age table, baby boomers have full retirement ages of 66-67.
The fourth component, and the one that I have argued has the most influence in determining what you will receive, is your claim age. For each year you postpone your benefit payment, your final monthly payment will increase by up to 8%, beginning at age 62 and continuing through age 69.
Receiving your Social Security benefit before you reach full retirement age means accepting a permanent reduction in your payment of up to 30%, depending on your year of birth. Meanwhile, waiting until after your full retirement age can increase your Social Security check by 24% to 32%.
| Year of birth | 62 years | 63 years | 64 years | 65 years | 66 years | 67 years | 68 years | 69 years | 70 years |
| 1943-1954 | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% | 132% |
| 1955 | 74.2% | 79.2% | 85.6% | 92.2% | 98.9% | 106.7% | 114.7% | 122.7% | 130.7% |
| 1956 | 73.3% | 78.3% | 84.4% | 91.1% | 97.8% | 105.3% | 113.3% | 121.3% | 129.3% |
| 1957 | 72.5% | 77.5% | 83.3% | 90% | 96.7% | 104% | 112% | 120% | 128% |
| 1958 | 71.7% | 76.7% | 82.2% | 88.9% | 95.6% | 102.7% | 110.7% | 118.7% | 126.7% |
| 1959 | 70.8% | 75.8% | 81.1% | 87.8% | 94.4% | 101.3% | 109.3% | 117.3% | 125.3% |
| 1960 or later | 70% | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% |
Data source: Social Security Administration.
This little-known Social Security mulligan may come in handy for baby boomers
According to data found in the Social Security Annual Statistical Supplement, the majority of retired workers chose to begin receiving their Social Security benefits before reaching full retirement age. In 2021, 65% of the 47.29 million retired workers at the time were receiving a permanently reduced monthly payment.
For some retirees, an early claim that permanently reduces monthly benefits is the optimal option. By “optimal” I mean the selection that generates the most lifetime claimant’s Social Security income.
For example, a person with one or more chronic illnesses that have the potential to shorten their life expectancy may benefit from an earlier claim. Similarly, a spouse with a low lifetime income might choose to receive their payment early to allow their partners’ benefit to grow over time. In this way, a couple can generate some family income while the larger benefit continues to grow.
However, early claims have a history of not working. A study published in 2019 by online financial planning company United Income found that only 8% of applicants ages 62, 63 and 64, combined, made an optimal decision.
Fortunately, there is a silver lining for baby boomers (and other soon-to-be retirees) who may regret their early decision to claim, though it comes with two significant pitfalls.
Image source: Getty Images.
The hidden Social Security renewal clause in question is none other than the SSA-521 form, which is officially known as the “Application Withdrawal Request.” In simple terms, SSA-521 is a request to SSA to withdraw your claim for Social Security benefits. If approved, your early claim is undone and your benefits re-accumulate up to 8% per year, up to age 69.
This Social Security mulligan is particularly useful for baby boomers with little or nothing saved for retirement who agreed to a reduced payment but ultimately returned to the workforce soon after. Boomers who land high-paying jobs may be incentivized to file SSA-521 and forego their pay in favor of a higher Social Security benefit years from now.
But Social Security’s all-important renewal clause comes with two very important restrictions. First, requests to withdraw or cancel your application can only be made up to 12 months after your benefit is approved. If you’ve been getting a Social Security check for, say, 18 months, you’re past the point where you can use this mulligan. Also, you can only cancel your claim for benefits once.
The other sticking point is that you will have to repay every cent of the benefits you received in the 12 months prior to the approval of SSA-521. This also includes any benefits your spouse or children may have received based on your earnings history.
While Social Security’s little-known recurrence clause has its limitations, it offers baby boomers a unique opportunity to start over if they regret filing an early claim with Social Security. This is invaluable and something every baby boomer should know.
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