Seniors looking for an out-of-the-box financial idea to increase income may want to consider paying back their Social Security. That’s right. I’m not talking about a take-it-for the team somebody else needs the money more than I do move. Quite the contrary; this strategy may produce an increased return for the client.
It’s sort of like taking a do-over, a mulligan on the government’s pension program. The strategy has been covered in Forbes magazine and was popularized in a newspaper column by financial writer Scott Burns. It’s based on a case study from Economic professor and financial planning software entrepreneur Lawrence J. Kotlikoff.
Here’s the deal. Americans vested in the Social Security system have a primary insurance amount. This is the amount that we get at our full retirement age, which varies depending on our year of birth. We can take benefits as early as 62, but in exchange for the steady check, we get a reduced benefit. On the other end, if we wait until 70, we get extra. Like good red wine, the inflation-adjusted annuity provided by Social Security gets better with age.
Here’s how it works, according to a case study from Kotlikoff available on his website http://www.esplanner.com/Case%20Studies/double_dip.pdf and the article by Burns. A person born between 1943 and 1954 would face this landscape. At 62, they would be eligible for 75 percent of their full benefit. At 70, they would be eligible for 132 percent.
As an example, assume a person’s benefit would be $1,000 a month at age 62. If they’d waited until age 70, it would have been $1,760 a month. The trick is that at 70, this person can indeed claim the higher benefit. The catch: they have to pay back all the money they received. A person files a request for Withdrawal of Application, SSA form 521, and it’s as if one never took the benefit.
The math is compelling. In the example above, the person would have to pay back $96,000. In return, they would receive $9,120 a year more in income. And that income is inflation-adjusted. This is an initial pay-out rate of 9.5 percent, far higher than one could get if they handed this $96,000 to anyone except Uncle Sam. They don’t have to pay back any interest on the Social Security they receive and they can reclaim the taxes they paid on the previous Social Security benefits. (See IRS Publication 915, pg. 15)
This strategy is not for everyone. In fact, it’s not appropriate for most people. One must actually have the money. Most people don’t simply save their Social Security and many don’t have this kind of excess savings. There is always the mortality risk. As with any annuity stream, if one dies before recouping the $96,000, their heirs may have been better off if they stuck with the original program. A spouse, however, may be better off in this case, and he or she might enjoy a higher survivor benefit for the rest of their lives. A final note of caution for those who may elect to take Social Security at 62 with the intent to exercise this option is in order. Although this is available today, the government could change the rules. It might not be available in the future.
Still, if at 70 one finds themselves with some assets and in need of increased income after having elected Social Security, this is one option to consider. It may be the best deal in town.