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Benefit suspension versus withdrawal

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POSTED July 5, 2013 11:00 p.m.

Q: I retired and filed for my Social Security benefits when I was 62 years old. I am now a couple months away from my 63rd birthday, and I've decided I can't live on my Social Security check. So I plan to go back to work full-time. I called Social Security and told them I wanted to withdraw my retirement claim. They sent me a form to sign, but told me I would have to repay all the benefits I've received in the last 10 months. This will be a hardship for me. But I don't know what else to do. What do you advise?

A: I don't think you should withdraw your Social Security retirement claim. I think you should simply suspend your benefits and have them start up again when you choose to retire for the second time. I am very surprised that the Social Security worker did not offer this option to you. Let's go over each of these two options.

If you proceed with the withdrawal, there would be an advantage and a disadvantage. The advantage is that when you start up your benefits again, they will come with no early retirement reduction for the months you've already received Social Security benefits. But the big disadvantage is that you will have to write a check for thousands of dollars to repay every nickel you've received in Social Security payments during the past 10 months. You said this would be financially difficult to do.

If you choose to suspend your benefits instead, there are also plusses and minuses. On the plus side, you won't have to pay back a dime to the Social Security Administration. On the minus side, your eventual Social Security benefit will come with a reduction, but only a reduction for the 10 months you've already received benefits.

To help you understand this more clearly, I'll use an example. You didn't tell me how much your Social Security check was, so I'll make up some numbers to help explain your options. Let's say your full (age 66) retirement benefit is $2,000 per month. That means your reduced retirement monthly benefit at age 62 would have been $1,500. And let's further say that you plan to continue working until age 66.

If you were to withdraw your claim, you would have to write a check to SSA for $15,000 ($1,500 per month times 10 months equals $15,000). At age 66, your benefits would start up again at your full retirement rate of $2,000.

(Actually, your benefit would be slightly higher because you will have three additional years of earnings to factor into your retirement computation. The same would be true for the withdrawal option. But to keep my math simple, I'm just going to stick with the $2,000 figure.)

If you simply suspend your benefits, you don't owe SSA anything. At age 66 when you retire, your ongoing Social Security retirement rate will be $1,900. Where did I get that number? As I said earlier, your benefit will be reduced only for those 10 months that you received a Social Security check before the suspension went into place. The early retirement reduction is roughly one-half of one percent. So that means an ongoing reduction of five percent must be applied to your retirement checks. Or to put that the other way around, you will get 95 percent of your full benefit from age 66 on. 95 percent of $2000 is $1,900.

So using the suspension option, you only lose $100 per month. And it would take you 150 months, or 12 1/2 years to get to the $15,000 you would have spent to go the withdrawal route.

In other words, if you think you're going to live until at least 78 1/2, then you are financially ahead in the long run to withdraw your claim. But even if you think you're going to live that long, I wouldn't do it. Do you really think it is worth waiting until you are almost 80 years old to recoup all that money?

There is one further point I need to make to other readers who might consider withdrawing a Social Security claim: It can only be done within one year of the date you filed for benefits in the first place.

Q: In a past column, you mentioned something you called ARF. I remembered the term and remembered thinking it might apply to me, but I can't remember what it meant. Can you explain it again?

A: ARF stands for "adjustment to the reduction factor." That's a bit of in-house SSA jargon for the procedure alluded to in the answer to the first question when I was discussing the benefit suspension option. ARF will come into play anytime anyone took reduced retirement benefits but then returned to work and has some of his or her Social Security checks withheld because of the earnings penalty provisions of the law. To explain this, I'll use a slightly different example than the one described above.

Let's say Mary took her benefits at age 62. Her full age-66 rate was $1,600 per month. Her reduced age-62 benefit came out to $1,200 with a 25 percent early retirement reduction. Mary works part time and makes $5,000 more than the annual Social Security earnings threshold. The law says half of that, or $2,500, must be withheld from her annual Social Security benefits. So each year between age 62 and 66, SSA will hold back two of her monthly checks and take another $100 out of a third check to recoup that $2,500 she owes to the government.

When Mary reaches age 66, the earnings penalty goes away and she is due all her benefits from that point on. At the same time, the ARF procedure is automatically triggered. Mary's original early retirement reduction was 25 percent. But instead of 12 full checks per year, Mary only got nine full checks (two checks were withheld and one was a partial payment). That means in the four years between age 62 and 66, Mary received only 36 full Social Security checks. So her ongoing retirement benefit can only be reduced for those 36 months. At roughly a one-half of one percent reduction per month, that means Mary's retirement benefit from age 66 on will be reduced by only 18 percent, instead of the initial 25-percent reduction applied to her when she filed for Social Security at age 62. Completing our example, that means that once the ARF recomputation is completed, Mary's ongoing monthly benefit will be $1,312.

 

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