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It's the Perfect Time for Baby Boomers to Take Advantage of Social Security's Do-Over Clause

Sean Williams, The Motley Fool

Few programs shoulder the importance that Social Security does. Each month, nearly 63 million people receive a benefit check, of whom 43.7 million are retired workers. Of these retirees, better than 60% rely on their payout to account for at least half of their income, with a third essentially leaning on the program for all of their income (90%-plus). 

Even more telling, Social Security has done more than any social program to keep the elderly out of poverty. An analysis from the Center on Budget and Policy Priorities finds that the elderly poverty rate with Social Security income is around 9%. Remove Social Security from the equation, and the elderly poverty rate would more than quadruple to north of 40%.

Two Social Security cards and two hundred dollar bills lying atop a payout card.

Image source: Getty Images.

Your claiming age has a big impact on your monthly and lifetime payout

Given how vital this program is, there's arguably no decision seniors will make that'll have a bigger impact on their financial well-being than their Social Security claiming decision.

As a refresher, there are four primary components that'll influence what the Social Security Administration (SSA) will pay you when you reach your full retirement age, as determined by your birth year. The first two factors are inextricably linked: your earnings history and work history. When determining your payout, the SSA will account for your 35 highest-earning, inflation-adjusted years. This is why you'll often hear the suggestion that you "work at least 35 years," because each year less of 35 worked will result in a $0 being averaged into your total. As you might expect, earning as much as you can, up to the maximum taxable earnings cap in a given year ($132,900 in 2019), and working at least 35 years, is one aspect to netting the highest payout possible.

The third factor that matters is one we have absolutely no control over: our birth year. Our birth year determines our full retirement age, or the age at which we become eligible to receive 100% of our monthly payout. The simple rule is that if you claim benefits prior to reaching your full retirement age, you're going to be accepting a permanent reduction in your monthly payout. Meanwhile, if you wait until after your full retirement age to begin taking benefits, you can actually receive more than 100%.

The fourth and final factor is your actual claiming age. Benefits can begin at age 62, or any point thereafter. There is, however, quite the incentive to hold off on taking your payout. Each year you hold off, your benefit will grow by approximately 8%, up until age 70. All things being equal -- i.e., same earnings history, work history, and birth year -- a retired worker claiming at age 70 could take home a 76% higher monthly payout than a retiree claiming at age 62.

A person filling out a Social Security benefits application form.

Image source: Getty Images.

Most retirees choose to claim early

Given this information about how the SSA calculates your retirement benefit, waiting is always the best move, right? Well, not exactly. There are a bounty of variables, including your health, financial, and marital status that need to be examined before deciding what claiming age is best for you. Nevertheless, it does demonstrate just how important your claiming-age decision is when determining your monthly and lifetime benefits.

According to an analysis by the Center for Retirement Research at Boston College, which culls data from the SSA, close to 3 out of 5 aged beneficiaries will claim their benefit prior to reaching age 65. By comparison, roughly 30% claim benefits around their full retirement age, and just 10% or so wait until after their full retirement age to begin their payout. This means a majority of retirees are all willing to accept a permanent reduction in their monthly benefit of up to 30%, depending on their birth year. If an aged beneficiary lives into their 80s, this reduced payout could wind up costing them a lot of money over the long run.

Why claim early then? Health is one factor, with chronic health conditions coercing some people to take benefits early. Filing early for lower-earning spouses can also make a lot of sense because it generates some income for the household while their partner's benefit is allowed to grow even larger. A lack of gainful employment is another reason why seniors may seek a retirement benefit sooner rather than later.

However, this last point could prove to be an incredible opportunity for baby boomers right now.

A baby boomer sitting on the couch and holding his glasses while critically looking at information on a laptop.

Image source: Getty Images.

Boomers should seriously consider making this Social Security move

Understandably, not all boomers are going to be in a position where their health will permit them to go back to work. But in those instances where boomers are healthy enough to work and have been receiving a Social Security benefit for less than a year, there are a couple of great reasons to consider filing Social Security Form SSA-521 (officially, "Request for Withdrawal of Application") right now.

Form SSA-521 is essentially a Social Security do-over clause. If, at any time within 12 months of receiving your first benefit check, you regret your decision to claim benefits early and wish you'd have been able to let your payout grow, you can file this paperwork to undo your benefit application. Assuming the SSA approves your request, you'll have to repay any benefits you've received. In doing so, it'll be as if you never claimed your benefit in the first place, restoring your payout to roughly 8% annual growth, up until age 70.

Why now? The simple reason is that the job market has just about never been better. At 3.9%, the unemployment rate is just a stone's throw above a 49-year low. There are more job openings than there are job seekers right now, which puts the ball into employees' courts when negotiating wages or salary. Given that boomers likely have plenty of skills and experience from being in the workforce for decades, they're the perfect candidates to reenter the labor force right now and command above-average earnings. These earnings could be more than enough to delay a Social Security benefit filing for a few more years, thusly allowing their benefit to grow.

A worried baby boomer lying his head and arms on a table while looking at a mostly empty piggy bank.

Image source: Getty Images.

Another good reason to consider this do-over clause is because boomers are poor savers. A November 2018 report from the Stanford Center on Longevity found that a third of boomers had no money saved in retirement plans, as of 2014. Without any savings, and expected to be reliant on Social Security as their primary source of income, these boomers are going to want to maximize their monthly payout from Social Security by waiting to claim until as late as possible. If any boomers with minimal savings have claimed early and they're still within 12 months of their first payout, filing Form SSA-521 and reentering the workforce is possibly a smart solution. 

Though each person's situation is unique, these conditions appear perfect for recent filers to benefit from Social Security's do-over clause.

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