Obscure Social Security Law Yields Big Benefits

If you follow my weekly column, you know that I have written cautionary tales about the survivability of our Social Security system in its current form. It is a Ponzi scheme of grand proportions and, in the near future, Congress will be forced to provide solutions as the money coming into the system falls short of the payments going out of the system. However, the greatest risk, I believe, is to the age sixty-and-under workers. No congressperson is likely to grab the political hot potato of reducing benefits to current Social Security recipients. This opens the door to an obscure financial strategy that may mean tens of thousands of dollars in additional Social Security benefits if you fall under the right circumstances.

Often, workers choose to begin taking their Social Security benefit as soon as they are eligible, which is age sixty-two. By doing so, they accept a reduced benefit for life. For example, if your normal full Social Security retirement age is sixty-six and you begin benefits at age sixty-two, your benefit is cut by 25%. A $1,000 per month benefit becomes $750. Had you postponed benefits until age 70, they would have risen to $1,320. Here’s where the financial opportunity comes into play. A little known law allows you to ‘re-set’ your Social Security payments by paying back the money you have received. By doing so, you have created two financial benefits for yourself. First is a tax-free loan from the government because there is no interest or penalties imposed related to the payback. Second, you’ve created an ‘annuity’ that will rival any commercial annuity in the marketplace. 
Let’s see how this might work out. As in our example above, assume you took early Social Security retirement for $750 per month at age 62. You are now age seventy and have decided to pay back all the money you have received and ‘re-set’ your payments based on Social Security retirement at age seventy. The math looks something like this: You must repay Uncle Sam the $72,000 in benefits you received. You’ll now begin receiving $1,320 per month for the rest of your life and the life of your spouse. This ‘extra’ $6,840 per year benefit is the equivalent of a 9.5% payout on your $72,000 ‘investment’. If you were to take that same $72,000 and buy a commercial joint life annuity, the payout would be approximately 7% (Charles Schwab & Co. www.schwab.com). Initially you’re about 25% better off plus Social Security benefits increase based on cost-of-living adjustments (COLA) whereas commercial annuities do not. This COLA advantage can be huge assuming at least one spouse lives a long time. In addition, another obscure law allows you to get back taxes you paid on your Social Security benefits.
Who are the ideal candidates for this strategy? First, it’s someone who has the financial where-with-all to repay benefits received. Second, one or both spouses should be in excellent health with a family history of longevity. In our example, you’ll get back your $72,000 ‘investment’ in about 4.5 years while your ‘break-even point’ for this strategy is about 10.5 years. If you’d like to receive a detailed report on this topic, email me at [email protected] and put “Social Security Re-Set Strategy” in the subject line.