| 01 September 2010
Sometimes things are just too good to be true. We have been talking with our retired clients recently about paying back Social Security benefits – interest and penalty free - that they may have started when they were 62 and starting over again now that they are 66 (or later). There is also a tax benefit to doing this (credit or deduction, but that is for the accountants to discuss with you). This reset can increase benefits approximately 6% for every year between 62 and 66, and 8% per year between age 66 and 70. In a market where returns have been negative and cash is paying next to nothing, this is a great opportunity. This is such a good opportunity that Social Security is proposing to change this rule.
Under the proposed change, Social Security would allow you to pay back your benefits only once in your lifetime and only within 12 months of when you first started. This 12-month limit would prevent most people from resetting their benefits, especially with the hindsight of a weak stock market like we have had over the last decade.
I am not exactly sure when this proposed rule might be enacted but if you are interested in starting over on your Social Security benefits, now is the time to act. You will need to go down to your local Social Security office to file the paperwork (form 521) and they will mail you an invoice for the payback amount. Whether you start taking a new, larger benefit immediately or wait until a future date is something you should discuss with your financial advisor and/or accountant. There might be other ideas (like our recent article on “file and suspend”) to consider as well.
As with anything, there could be drawbacks to this strategy. The biggest one I see is life expectancy; if benefits are paid back then you need to expect to live long enough for the new, larger benefits to come your way for a number of years to equal that big check you had to write. If you live longer than that breakeven period though, you win.
In talking to people about this strategy, it always sounds good but in the end, writing the check is difficult for a lot of people. According to Kiplinger.com, in 2007 only 500 people out of 37 million Social Security beneficiaries actually took this payback option and wrote the check. By 2009, twice that number of people used this strategy. It is a small number overall, but if you want to be one of the select few retirees, talk to your financial advisor soon to see if it makes sense before the rules change.