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Investing Specialists

A Do-Over for Social Security Benefits

The healthy and wealthy are the best candidates for this maneuver.

I waded into the Social Security fray last week, but as your many worthwhile comments (36 and counting) show, there's a lot more to discuss.

On its face, the decision about when to take Social Security benefits might seem to revolve around longevity: Take them sooner if you're not healthy; wait if you're healthy and both your parents lived into their 90s.

But needless to say, forecasting your own life expectancy is a crap shoot. Moreover, there are plenty of other complicating factors to consider, such as whether you have a spouse, his or her age and level of earnings, and how long you plan to continue working. Throw in additional questions about potential changes in Social Security and future tax rates, and you've got a real mess on your hands.

An additional wrinkle, as several of you pointed out, is that the decision about when to take Social Security isn't irrevocable. By taking advantage of a provision in the Social Security system, you can begin taking Social Security as soon as you're eligible, but at some point cease taking benefits, pay back the IRS the money you've already received, then begin taking Social Security later on at a higher rate. The later you begin receiving Social Security, the higher the payout will be throughout the rest of your life.

On the surface, this option might seem to offer the best of all worlds. Starting benefits early means that you'll collect at least some of what you've paid into the system, thereby hedging against the risk, however slight, that you'll expire just a few years after you begin receiving benefits. And if it turns out you live longer--to age 69 or 70, say--employing the do-over enables you to take advantage of the higher payouts available to older folks.

But successfully employing such a strategy isn't failsafe, so it pays to fully understand the implications before availing yourself of this option. This is also one area where seeking help from a financial advisor who's battle-tested in the ways of Social Security can earn his or her keep many times over.

Back to Break-Even
Here's an example of the do-over provision in action. A man who has retired from a position that paid $100,000 per year could earn a monthly benefit of $1,600, not including cost of living adjustments, if he began collecting Social Security at age 62. At age 70, he could then file Form SSA-521, thereby withdrawing his application for Social Security benefits, and repay the benefits he had received to date (approximately $154,000, plus any COLA adjustments and Medicare premiums deducted from ages 65 to 70). After that, he could restart benefits at a new, higher level of $2,800 per month. In so doing, he'd net 42% more per month than the monthly benefit he received from ages 62 through 69. Further sweetening the pot is that he won't owe any interest when he pays back the $154,000 to the government. He could also recoup much of the taxes he had paid on those benefits by filing an amended tax return.

But there's a risk. Just like the individual who starts collecting benefits at age 70, the do-over person needs to have longevity on his side. If the individual dies shortly after restarting benefits at his new, higher rate, he would forgo nearly all of the Social Security benefits that were available to him. And even individuals who aren't that unlucky will have to live a good 10-plus years (close to 13, in my example) to break even on their wager.

So in a way, employing the Social Security do-over requires successfully guessing your own longevity almost as much as picking a single date to begin collecting Social Security. The key difference is that by age 70, you're likely to have more clues about your health in your senior years than you did when you were 62.

Who Should Consider It
The healthy and wealthy will tend to be the best candidates for a Social Security do-over. First, the healthy part: As with delaying receipt of Social Security, the do-over option is going to be most palatable for those with longevity in their families; type "Longevity Calculator" in a search engine to help guesstimate yours.

And you'll also need to have a fair amount of liquid assets to employ this strategy, because you'll need to pay back the past benefits to the government in a lump sum. Thus, this idea is best suited to young, wealthy retirees who don't need their Social Security benefits to fund living expenses; they could invest the Social Security checks that they receive from age 62 to 70 in cash or even a short-term bond fund, pocket that interest, then pay the government back without breaking a sweat.

Individuals who began taking benefits early but want or need to head back to work--and that's a growing group--may also be good candidates for a Social Security do-over. That's because your benefits will be docked if you're not yet of normal retirement age and your earned income rises above a certain threshold; this publication details the specifics.

Couples may also benefit from this move: If an individual restarts Social Security benefit collection at a higher rate later in life but proceeds to predecease his or her spouse, then the spouse will be eligible for a higher spousal benefit than would be the case if both spouses began collecting Social Security at a relatively young age.

See More Articles by Christine Benz


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