Strategy to Boost Social Security Benefits to be Eliminated

In 2009 I wrote a column about an obscure financial strategy that may mean tens of thousands of dollars in additional Social Security benefits if you fall under the right circumstances. Apparently more and more people are taking advantage of this strategy and the Social Security Administration has indicated their intention to change the rules. Here’s how it works:
 
Often, workers choose to begin taking their Social Security benefit as soon as they are eligible, which is age sixty-two. By doing so, the monthly benefit that they receive is reduced by 25% for life. For example, if your benefit at your ‘full’ retirement age 66 would have been $1,000 per month, your age 62 benefit becomes $750 per month for life. Had you postponed benefits until maximum retirement 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 your 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 think this strategy might benefit you or someone you know, the time to take action is now. The Social Security Administration could take action to change the rules within a few short months. To get started you’ll need to file SSA Form 521, ‘Request for Withdrawal of Application’ with your local Social Security office. In a few weeks, they’ll let you know how much you must repay, including spousal benefits. You’ll also want to discuss this with your financial advisor before implementing.