The Social Security Do-Over Most People Don't Know Exists

Even if you prioritize IRA or 401(k) contributions during your working years, you may need Social Security to meet your retirement goals. That's why it's important to file for benefits at the right time.

If you file for Social Security before reaching full retirement age (FRA), you'll reduce your benefits. The earliest age to claim Social Security is 62, and the sooner you claim, the more of a reduction you'll face. For example, if your FRA is 67 and you file at 62, your monthly checks will shrink more than if you file for Social Security at 65.

Filing for Social Security before reaching FRA usually results in smaller monthly payments for the rest of your life, but one lesser-known rule could help you get larger benefits even after you've claimed them.

The impact of claiming Social Security benefits early

Even though you're allowed to claim Social Security benefits once you turn 62, filing ahead of FRA could hurt you financially in retirement. If your FRA is 67, which is the case if you were born in 1960 or later, you'll reduce your benefits by 30% if you claim them at 62.

That means a $2,000 monthly benefit at 67 is only worth $1,400 when it's claimed five years earlier. Over time, that could add up to a lot of lost money.

Plus, Social Security benefits are eligible for an annual cost-of-living adjustment (COLA) so that those payments are able to keep up with inflation. But the earlier you file for benefits, the less money each annual raise is apt to put in your pocket.

For example, a 3% COLA applied to a $1,400 monthly check won't give you as much money as a 3% raise applied to a $2,000 monthly check. For a $1,400 check, you're looking at $42 more per month, whereas with a $2,000 check, you're looking at an extra $60.

How the do-over option works

If you file for Social Security early and regret that decision, you're not necessarily stuck with reduced monthly checks. Social Security has a do-over option you can exercise.

To take advantage of this option, you must withdraw your application for Social Security within 12 months of having your benefits approved and repay all of the money in benefits you received. That includes any money you had withheld from your benefits for Medicare premiums. The official form to exercise the do-over option is Form SSA-521.

When the do-over makes sense

There are certain situations where it could pay to take advantage of Social Security's do-over option. The first is if you're collecting benefits and are struggling to keep up with your monthly bills based on your reduced checks. If that's the case, it could pay to withdraw your benefits application, go back to work for a few more years, and then file for Social Security again at a later time.

Another scenario where it could make sense to exercise the do-over is if you realize you're likely to live a long life. Let's say you claim Social Security but then have a physical and get an excellent bill of health. In that case, reduced benefits may not only shrink your Social Security income on a monthly basis, but also, a lifetime basis.

Aim to choose the right filing age from the start

Not everyone knows that Social Security has a do-over option, but it could save you from getting stuck with reduced checks on a permanent basis. That said, taking advantage of the do-over isn't exactly easy. To do so, you must repay all of the money Social Security paid you. If you've already spent those checks and can't find the money, undoing your claim may not be possible.

That's why it's ideal to choose the right Social Security filing age from the start. Before you file for benefits, think about your various retirement income streams, health, and life expectancy. All of these factors could help you land on the right time to claim benefits so you don't have to scramble to repay the money you received.

Bottom line

Social Security will probably be an important part of your retirement plan. So it's important to choose your filing age strategically.

Before you claim Social Security, think about your total spending needs and retirement income sources. If you only have a small amount of money saved for retirement, you may want to err on the side of filing for benefits at FRA or even beyond. The same holds true if you have a lot of lofty goals for retirement, like traveling multiple times a year.

Each year you delay your claim past FRA boosts your monthly Social Security checks by 8% on a permanent basis, up until age 70. And locking in larger checks could lead to less financial stress throughout your senior years.