I often say that fifty percent of my job is educating clients. However, from time to time that works in reverse, and they educate me. Recently a client told me about an obscure provision in the Social Security laws that allows you to increase your benefits, even after you’ve started to receive your monthly checks.
Here is how it works, according to an article by Mary Beth Franklin in the July 2008 issue of Kiplinger’s Personal Finance magazine:
If you elect to begin receiving Social Security benefits at age 62, your monthly checks are 25% smaller than they would be if you waited to start taking benefits at the full retirement age. That reduced amount applies for the rest of your life.
Social Security law, however, provides for a little-known method of changing your mind. You can begin to receive benefits at age 62. After reaching your full retirement age, you can cancel your application for benefits, repay what you have received up to that time, and reapply. At that time you’ll begin receiving the higher monthly amount.
I spent some time pondering this new information. At first blush, it would seem there would be very little downside to starting your Social Security at 62, if you would have the means to repay what you’ve received and reapply. In essence, you would receive an interest-free loan.
This would be similar to buying a life annuity from an insurance company that would pay you the difference between the full and reduced Social Security benefits. The difference is that repaying Social Security benefits would appear to be cheaper than buying an annuity.
In an article in his online magazine Retire Early (www.retireearlyhomepage.com), editor John Greaney says, “Given the ability to withdraw your Social Security application and then refile at a later date, about the only reason I can think of for delaying taking Social Security benefits beyond age 62 is if you continue to work and earn more than the annual limit causing your benefits to be penalized. . . . If you start taking benefits at age 62, you can always reevaluate your health status at age 69 and do a withdrawal of application and refile if you’re still in good health and ‘feeling lucky.’”
Greaney’s comment about “feeling lucky” highlights one of the downsides of this strategy. Just as with purchasing an annuity, you would run the risk of not living long enough to recoup your investment. If you died before you got back the benefits you had repaid, your estate would simply be out whatever amounts you had paid back to the U. S. Treasury.
Another significant issue is that, if you retire at age 62 because you need the Social Security benefits to pay your bills, you probably aren’t going to be able to afford to pay back the benefits a few years later. The lump sum, which would probably range between $100,000 and $150,000, would be beyond your means.
The Kiplinger article also discussed a couple of other strategies for gaining maximum Social Security benefits. One possibility, for example, is for the lower-earning spouse to apply early for spousal benefits, while the higher-earning spouse waits longer. This can make a significant lifetime difference in their total benefits.
For several reasons, I’m not ready to recommend the “apply early and change your mind” approach to every client. What this information makes clear, however, is that applying for Social Security benefits is more complex than you might think. Especially for couples, it’s important to take the time to consider all the available options before you start filling out an application form.