Even if you don’t play golf, you may be familiar with the concept of a “mulligan.” Although strictly speaking it is against any version of the rules of golf, in casual play (typically involving players of lesser ability) a group may agree that a player may replay a poorly hit shot without penalty. Usually the opportunity for a mulligan is limited to the first shot on the first tee, the theory being that the player might have rushed to the golf course with no chance to warm up or practice, and thus the first shot is considered compensation for having arrived in a lather without leaving time to prepare. I once played with a group that allowed each player a “hooligan” – best described as a “floating mulligan” – meaning that one poorly hit shot could be replayed without penalty at any time during the round.
The Granddaddy of All Hooligans. Under the Social Security system, there used to be a rule that allowed you to begin receiving your benefits at age 62-1[1], continue receiving them for nearly 8 years and then, just before you reached age 70, you could decide to repay all the benefits you had received with no interest and start all over at age 70 with maximum benefits. But after articles began appearing in the financial and popular media touting “interest-free loans from the government,” the SSA decided in December 2010 to shut down this opportunity.
What if you make a mistake? What remains is a much more conservative mulligan: within 12 months of the time you first claim Social Security benefits, you may withdraw your application by repaying all of the money you received, including payments to spouses or dependents that were attributable to your having claimed your own benefits.[2] This approach makes most sense as a way to rectify mistakes, rather than as a planning strategy. For example, I periodically encounter couples where one spouse has claimed benefits some months earlier without fully realizing the implications of that decision. Once I have prepared an analysis and they have seen other options that are more attractive to them, they are often motivated to take the mulligan and start over.
What happens if it has been more than 12 months since you first claimed? Well, it depends on your age at the time you claimed and your current age. If you claimed before your Full Retirement Age (FRA) – which is age 66 for those born between 1/2/1943 and 1/1/1955 – there’s not much you can do until you reach age 66. However, once you reach age 66 you may suspend your benefits. Doing so allows you to earn Delayed Retirement Credits[3] while payments are suspended. Age 70 is the latest age at which you should resume receiving payments. As there are no DRCs earned after that point. If you suspend at age 66 and resume at age 70, your payments will be 32% higher than they were when you suspended. [48 months x 2/3% = 32%]
If you were age 66 or older when you first claimed, and more than 12 months has passed since that time, you can still suspend at any time up until age 70 and earn delayed retirement credits for the number of months between now and age 70.
What about if you miss an opportunity? Sometimes the mistake is not claiming too early, but rather failing to claim as early as would have been best for you. If you are under age 66, there’s no mulligan available. You must wait until 66. But suppose you are 67, and if you had only known that you could have claimed spousal benefits at age 66 you would have done so. You can’t go back to age 66, but you can file now for spousal benefits and request up to six months of retroactive benefits.
A planning opportunity – do not try this at home! Under certain circumstances, it may make sense to suspend benefits begun before FRA (see above) when you reach Full Retirement Age, or to file for benefits at or after FRA, but then immediately suspend payments (“file and suspend”). A little known fact is that, having suspended your benefits, you are free to resume them at any time, even retroactive to the month you suspended! Of course, you do not earn delayed retirement credits in any months for which you receive retroactive payments.
This strategy would not be commonly used, but I had a situation recently for which it seemed perfect:
Carl is currently unmarried[4] and just turned 66. He doesn’t really “need” his benefits now, although they would be nice to have. He just doesn’t want to take the chance that he might be diagnosed with a terminal illness between now and age 70. It would be bad enough to die young, but he would hate to have left up to four years of benefits on the table in an effort to protect his income for what now turns out to be a very short life expectancy.
If Carl simply decides not to file at 66 while waiting to reach 70, the best he can do is claim benefits immediately upon hearing the bad news. But if he were to file and suspend at age 66, then he can resume (or begin receiving) benefits retroactively, in which case he could collect up to 48 months’ worth of benefits as a lump sum and leave nothing on the table.
In summary, the famous 8-year interest-free loan from the government is now a thing of the past, but there are still enough mulligans and hooligans in the system to help you make up for some poorly hit shots.
[1] 62-1 means age 62 and 1 month. Although we think of Social Security benefits as beginning at age 62, there is a requirement that a claimant must be 62 for an entire calendar month before benefits can begin. For all practical purposes, the earliest retirement benefit one can receive begins at age 62-1.
[2] For example if you filed your claim on March 17 and received your first payment on April 10, the 12-month period begins on March1 and ends on February 28 (or 29) of the next year.
[3] Called DRCs by the SSA, these are increases in your monthly Social Security benefits if you delay claiming benefits on your own record past your Full Retirement Age. For each month you suspend, 2/3% of the amount you were receiving (or of your PIA, if you had not been receiving payments) is added to your benefit. For example, if you had claimed at age 62 and were receiving $1,500 per month, suspending from age 66 to age 70 would provide you with a benefit of $1,980 per month when you resume at 70.
[4] In this situation, it makes no difference whether he was never married; was married and divorced; or was married and widowed. There may be complications if the person is currently married, which is why I would encourage you to discuss the situation with a Social Security expert before implementing this strategy.