While there can be advantages to delaying taking Social Security, in a tough economy, some might not have a choice. After all, for those who find themselves out of work after age 62, Social Security provides a significant safety net.
But should your fortunes reverse and finances recover, it may be worth pursuing a little-known strategy and repaying the Social Security benefits you found yourself needing to take. It’s a complicated calculation — especially if you’re married — and there are risks involved. But in the appropriate situation, the result could be bigger benefit checks later in life.
There’s often an inclination to claim Social Security as early as possible. After all, some people reason, it’s their money and they could get hit by a bus.
But the system is designed to encourage waiting.
For starters, those who claim benefits before reaching official full retirement age — which is based on year of birth — receive a smaller monthly amount.
For example, somebody due to receive $1,000 in monthly benefits at the full retirement age of 66 would receive only $760 a month if he or she retires at 62. Waiting until age 70 results in a monthly check of $1,320.
It Pays to Wait
Ultimately, waiting just a couple years to take Social Security and getting the bigger checks later in life helps reduce the risk of outliving savings.
Brett Horowitz, a principal at financial advisers Evensky & Katz, uses the example of a 62-year-old unmarried man who would receive full benefits of $24,000 a year at age 66. By delaying retirement until age 68, by the time he is 95 years old, assuming he lives that long, he would have received $166,000 more than if he retired at age 62 and $54,000 more than if he started collecting at age 66.
But the combination of a terrible job market, stock-market declines and low interest rates is wreaking havoc on the financial plans of many retirees. In some circumstances, plans for delaying benefits may have to be thrown out the window.
That’s where repaying Social Security benefits can come in. A little-used window provided by the Social Security Administration allows retirees to pay back their benefits and re-apply later.
This maneuver has gained notoriety as a way to game the system. It technically allows a retiree to claim benefits at an early age, repay them at an older age, and then get the bigger benefit check afforded those who delay their benefits.
As the Center for Retirement Research at Boston College noted in a 2009 report, that retiree essentially would get a “free loan” from Social Security at the expense of other retirees. It’s not foolproof, however. Those who die shortly after repaying the benefits stand to lose money, the report noted.
It also gets complicated when there’s a spouse in the picture. A benefit of delaying benefits is that not only will the retiree get a bigger benefit, but when one spouse dies, the survivor receives the greater of the couple’s benefits. For those trying to game the system, a spouse could be left with lower benefits should the one claiming early benefits die before refiling.
A big hurdle to repaying benefits is that it has to be done in one lump-sum payment — and includes any benefits paid to a spouse and most Medicare premiums. For those who have taken benefits for many years, this requirement may put repayment out of reach unless there’s a financial windfall, such as an inheritance or a real-estate sale.
But for those who claim benefits for only a short period of time out of temporary financial need, it may be a more feasible option. The application to withdraw from Social Security is a simple one-page form, SSA-521, that asks the reason for the withdrawal. After submitting the form, the Social Security Administration notifies you of the amount you need to repay.
Recovering the taxes paid on benefits requires some additional paperwork at tax time, either by taking an itemized deduction or taking a tax credit.
Live Longer, Bigger Payoff
For those looking to run the numbers on whether this strategy makes sense, AnalyzeNow.com provides a mix of free and low-cost retirement-planning worksheets that can be used to simulate both the impact of delaying taking benefits and repaying them. In addition to savings, a crucial variable is often life expectancy; the longer you expect to live, the more likely delaying benefits will be worthwhile.
Bud Hebeler, founder of AnalyzeNow.com, urges those considering the step to carefully weigh the impact on spousal benefits, especially if the spouse has already started taking benefits.
“I recommend that in any case where a spouse has already started spousal benefits that they go over the assumptions with someone in their local SSA office as well as to call the national SSA phone number and get a second answer,” Mr. Hebeler says.
While the math can be complicated, if the result is a bigger Social Security check later in life, Mr. Hebeler thinks it’s worth it: “You can’t buy an insurance policy any cheaper than this and expect to get a lifetime benefit with an unlimited inflation adjustment.”