Terminating Social Security Payments: Understanding the Implications and When It's Appropriate
Swinging the Social Security Pendulum: Your Second Chance
Social Security is a prominent part of many retirees' lives, but what if you find you don't need those benefits anymore? Let's dive into the little-known option of suspending your Social Security payments — yes, you read that right. Here's what you should know about taking a break from your benefits and when it might make sense.
Suspending Social Security: What's the Deal?
When you hear "suspend Social Security," don't be fooled into thinking it means withdrawing your benefits. That's a separate procedure.
Cashing Out Your Retirement Benefits — But With a Twist
If you've reached the full retirement age (which varies based on your birth year), and you're not yet 70, then you're eligible to put your retirement benefits on ice. But remember, this trick only works if you've reached full retirement age.
Suspending your benefits can have some advantages, all tangled up in the goal of increasing your income.
"If you keep working or have other income sources and don't need that Social Security check, it's beneficial to hold off on the payments to secure a bigger payout in the future," says Shelli Woodward, a tax analyst at Merchant Maverick.
For every year you hold off, your monthly payout will grow by 8 percent, according to Andrew Latham, CFP, managing editor of SuperMoney.com.
"Take someone born on New Year's Day in 1955 as an example. They could've started collecting their regular benefits in December 2020. But by suspending their benefits until December 2024, they could boost their monthly benefits by an impressive 32 percent," says Latham.
Don't forget, you get to continue collecting cost-of-living adjustments (COLA) even when your benefits are suspended.
It's vital to know that this strategy only makes your payments bigger until you turn 70. And remember, full retirement age has been on the rise recently, narrowing the gap between your retirement age and the age of 70, reducing the overall bonus for postponing social security benefits.
Making the request to pause your benefits can be done either verbally or in writing, and your benefits will be suspended in the month following your request. Your benefits will automatically resume when you turn 70, though you can also choose to restart them at any time.
Oh, and one last thing — you won't need to return the money you've already received during the suspension period.
Cashing Out Early, and Repaying Later: The 'Do-Over' Option
On the flip side, if you decide you want to cease your Social Security payments altogether, you can file for a withdrawal of benefits at any age. You can pull out of the program up to 12 months after you first become eligible for it.
"The Social Security Administration will treat you as if you never signed up in the first place," says Bruce G. Kaserman, president of BGK Financial. "Your payout will then have a chance to grow even bigger, obeying the usual Social Security benefit increases."
To withdraw your benefits, you'll need to complete Social Security Form SSA-521 and obtain written consent from anyone receiving benefits on your account. Keep in mind that you're allowed only one withdrawal throughout your lifetime.
Caution: Be mindful of the 12-month deadline for withdrawals. If you fail to meet this deadline, you might find yourself trapped in Social Security until you reach full retirement age — or face the consequences of unnecessarily suspending your benefits.
When Does It Make Sense to Sit Out Your Social Security Payments?
Making the call to take a break from your Social Security payments ultimately depends on a multitude of factors. But here are some of the most significant factors you should consider:
- Prolonged Lifespan. If you anticipate living a good few years beyond your previous expectations, then holding off on your Social Security payments could make sense. You might want to perform a break-even analysis to find out what's best for you, but remember that timing is crucial when it comes to spousal benefits.
- Tax Consequences. If you're working while collecting Social Security benefits, you might find yourself owing a pretty penny in taxes, especially if you file early. "You're already losing 25 percent of your benefits for taking them early, and any earnings over $23,400 in 2025 will cause you to lose more of your benefits," says Chuck Czajka, Certified Social Security Claiming Strategist (CSSCS) and founder of Macro Money Concepts. So, you might start taking your benefits early, find a job, and realize your after-tax benefits are not what you bargained for.
- Misunderstandings. "Someone who collects early might not grasp that they're locking in a lower monthly benefit than what they could get if they waited longer," says Chris Orestis, president of The Retirement Genius.
- Medicare Costs. Retirees often have Medicare premiums deducted from their Social Security checks. So, if you suspend or withdraw your payments, you'll need to foot the bill for any premiums yourself.
- No One's Depending on Your Benefits. If no one else is depending on your Social Security income, then it might make sense to go the DIY route. "Don't forget that if you suspend your retirement benefit, it also means anyone receiving benefits on your record, with the exception of a divorced spouse, won't be able to collect during the time your benefits are suspended," says Latham.
- Can Afford the Wait. If you're holding out for a larger benefit, be sure you can cover your expenses until your payments restart. And if you're withdrawing your benefits, you'll need to be able to afford not just your living expenses but also the repayment of any benefits you've previously received.
In conclusion, making decisions surrounding Social Security can be tricky, with numerous factors to consider. That's why finding a financial advisor who can work in your best interest is vital to navigating this complex terrain.
- If you have personal-finance strategies that involve working past the full retirement age and have other income sources, suspending your Social Security payments could be beneficial as it can result in a larger payout in the future.
- For those who are in a position to cover their living expenses without reliance on Social Security, temporarily withdrawing their benefits could be an option to secure a bigger payout in the future, given they meet the necessary conditions and avoid potential pitfalls such as deadlines for reentry and repayment.
