This is actually an odd little teaser that a few readers sent in to me recently — including one who offered a solution that is actually correct (forgot to ask for permission, so I won’t mention the name). Smart readers here, as always.
What we get here, in exchange for subscribing to Steve Sjuggerud’s True Wealth, is an explanation of how you can use “Form SSA-521” to increase your Social Security checks. The teaser says that “every retiree should read this” … and there’s some truth to it, certainly. Though you don’t need to subscribe to anyone’s newsletter just to find out what it is.
I won’t go into great detail on this one — it’s not super sneaky as so many of these teasers are. There is, for example, actually a form number 521 involved, they didn’t just make it up.
What the teaser tells us is that many people can raise your social security payments, and that very few people did so last year, and that even most Social Security Administration employees have never heard of it before. It essentially is a way to restart your Social Security clock — if you have applied for Social Security you know that your payments are much higher if you wait a few years than if you take the payments as soon as you become eligible.
Essentially what’s being teased here is a way to double dip at the government soup tureen.
Anyone who has applied for Social Security can also place a request to withdraw their application. If you applied five years ago and started receiving checks when you were 62, for example, you could file form SSA-521 to request a withdrawal of your application, and then after that’s processed you could apply for Social Security again, this time at the much higher payments you would receive as the 67 year old that you now are.
So what’s the catch? Well, you have to repay any money you received. Which stands to reason, if you’re withdrawing your application five years after the fact you have to pay back those 5 years of Social Security checks.
Why do it? It’s essentially an interest-free loan. As I understand it, you don’t have to pay interest on those five years of payments you’ve received from Social Security, you just have to pay back whatever you’ve received.
Other than that, it’s essentially an actuarial question — how long are you going to live, and how long would you have to live to make it worth it to restart the clock? The payments for someone five or ten years older than the minimum Social Security age can be dramatically higher, so for many folks it will probably be a genuinely good thing to do.
Any other catch? Well, the reason not many folks have done this in the past is that the process for withdrawal of a Social Security application looks like it was generally designed to correct errors, and probably the few hundred folks who did this last year did so because they messed up their application, or didn’t understand the graduated payout schedule and later realized that they didn’t really need to apply yet after all and might as well wait for larger checks.
The wide publication of this idea happened just earlier this year — Laurence Kotlikoff, a Boston University economist, was the one who is credited with bringing this to everyone’s attention. He published his info earlier this year, and it got a fair amount of attention from financial planners and the money media.
So … should you do this? I have no idea, it would probably be worth reading up on it, and talking with your financial adviser, but from the articles I’ve seen it certainly is worth researching if you took Social Security early and you’ve got the money to pay it back, perhaps especially if you are optimistic about your life expectancy from this point.
The bigger question for some folks who are a bit younger, near the time when they can apply for Social Security, is whether you should take early Social Security even if you don’t need it, with the intention of using it as an interest-free loan and withdrawing your application and repaying it in a few years. In my opinion that’s an ethical question as well as a political and financial one — the fact that this is a very new thing for the Social Security Administration means that they may well change the rules to counteract this loophole.
And when you do file SSA-521, you do have to give a reason for requesting your withdrawal, whether you’re going back to work or something else. I have no idea whether they care what these reasons are, or if they ever reject these applications for withdrawal, or will do so in the future.
Certainly there was no intent for Social Security to offer interest-free loans to retirees, so I wouldn’t be surprised to see them clamp down on this eventually. I have no idea what impact that might have on folks who tried to game the system by taking Social Security payments early with the intention of paying them back, but it’s something to think about — I would consider this a loophole, so it would not be surprising if they didn’t make any provisions to “grandfather in” folks who tried to exercise this loophole. My perspective could certainly be very wrong, I’m no expert on Social Security, nor am I a financial planner, this is just my opinion.
Here’s a start for you if you want to read up:
The explanation from the Social Security Handbook is that yes, you can replay your benefits and withdraw your claim, click here to see their formal explanation — it’s 1515.2. The actual form is really called SSA-521, you can download the pdf here if you like.
There’s a very brief explanation of what it is in a story from Marketplace (the NPR show).
There’s an article from Investment Advisor magazine that explains how this works.
And if you want to see ground zero of this, here’s an explanation of the numbers from Dr. Kotlikoff, the economist who brought this to the attention of a lot of folks and is quoted or cited in most of those stories. His case study includes a chart that gives you some idea of how this might impact an individual as you begin to understand whether this is a worthwhile thing to do.
If anyone out there in Gumshoe land has done this, or looked into it, feel free to share your experiences or opinions. It’s real, but I’d make sure to run your numbers through the scenarios — you can probably skip Steve Sjuggerud and go straight to whoever you trust for your financial planning advice if you don’t like digging in to the data and the government forms by yourself.
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I got Sjuggerud’s email and checked out SSA-521. I immediately saw the catch.
I’ve been collecting S/S for exactly 5 years, since I turned 62. I’d have to pay back $84,000 to collect about an extra 5 or 6 hundred bucks a month.
No thanks.
According to the SS website, you can’t file an SSA-521 if you’ve been collecting longer than one year. I started receiving payments at age 62, last year. Payments are $839/mo. If I paid back the 11 payments I will have collected ($10,068) by the end of the year, my payments would rise to $886/mo, an increase of $47/mo or $564/yr. It would take 17.85 years to recover the amount I would have to give back. That would be pretty stupid–especially considering that if I invest that $10,068 at 3% for 17.85 years, it will grow to $16,641, which is $6573 better than sending it back to the government.
I wonder how this works, if a person is on Disability Retirement??? Would THAT have to be paid back? OMGawsh~!
The real point, that no one seems to get, is that if you delay taking payments from Social Security you are making a loan to the government at a very low rate. Only those who place a very low value on money would consider doing such a thing. It is very easy to construct a spreadsheet to play around with the variables of expected years of life past 62, estimated payments at 62, 66, and 70, and rate of return–the scenarios tend to show a higher present value for starting payments at 62, never mind SSA-521.
To: Massey,
Yes you would have to pay back the $84,000.00. In return you get an immediate annuity that would be paying about 7.5% that is indexed for inflation. Obviously if don’t have the cash it is not relevant. But if you have the money sitting in a CD or other liquid instrument where else are you going to get that kind of deal
One other thing if you are married and in good financial shape then you have a dual life expectancy to bank on in order to make it worthwhile
Actually your daughter can collect social security on your record until she graduates from high school even if she is 19. The money for her is to be used for her upkeep. There is nothing saying you must invest it for her college years. That being said, colleges consider a bigger portion of money in her name should go toward her education bills than your funds because you have household bills and she doesn’t. Plus at your age and if you’re retired they figure you need more of your income to fund your later years. Take note that they do not consider IRA savings, 401 retirement accounts or life insurance. Therefore it pays to use the 50% Soc. Sec. benefit from your record for her needs while she is still in high school. After all that’s why she qualifies for it. The whole idea is you’re retired and bringing in a lot less money to support her.
I wonder whether the payback amt would also include additional social security payments for a minor child? We adopted a child from foster care 4 yrs ago who will only be 14 yrs old when I turn 62. She will be eligible for payments in the amt of 50% of my benefit, from the time I first start my social security, till she turns 18. For that reason, I’ve been thinking I should take the lower benefit payable to me at 62 rather than waiting till my “full retirement age” of 66, since she’ll be almost 18 then and would be eligible for the 50% benefit (even if it’s 50% of a higher amount)for only a few months. I believe the minor child benefit would be payable directly to her, though, so wonder whether it would have to be repaid with SSA 521 along with the benefits received in my own name since age 62? That extra $ and the timing of it from age 14-18 would sure help toward funding her college tuition, especially with my husband’s and my overall income being significantly reduced in retirement. I’m also curious about whether and how a social security benefit, particularly one paid in her name, could potentially affect her eligibility for need-based financial aid for college. Even if she’s drawing 50% of my social security benefit amt, it would end when she turns 18 (when she’ll she’s only a few months into her senior yr of h.s.), so she wouldn’t be getting that income when she’s in college, but would still be getting it during the timeframe when she’d have to start applying for college admission and financial aid….so would it “count” in financial aid formulas? Would appreciate input on this (and the social security question) from anyone who’s knowledgable about it. Thanks!
Real world experience: (Ref: AARP) Most of the people on SS start at 62 because they desperately need the money. Paying back is not an option. The majority of the rest have not done fancy financial things with their money and paying back is in fact not possible.
I waited for “Full Retirement” age so that I would not have the huge penalty tagging along for the rest of my life. Then, although I was still working, I started the SS and that is the money I put into the Market.
When I was forced to retire suddenly, a long time before I had expected (in my case from illness related to aging) there was experience with the Market and a functioning investment process. That is in addition to and separate from the 401K. The result is a ready source of cash if needed and confidence in what to do with Mandatory Distributions from the 401K.
Now that I am using the SS to pay for daily needs I am very happy that I am receiving the full amount. Meanwhile, high-dividend investments provide a trickle of additional money to help with daily needs. Unused money, if any, is reinvested as a hedge against inflation.
Before I turned 65, having planned to continue working, I did a spread sheet using SS estimates for factoring whether to start drawing SS or wait until I actually retired. I found that I would receive more money (over the course of an estimated life span) by waiting but it would be a gamble as to my life span. I chose to start SS payments at 65 and then was able to max out contributions to my 401k for 4 years. I retired at 69 with a bigger nest-egg than if I had waited until 69 to start SS payments. The income tax on 85% of SS payments while continuing to work was offset by 401k contributions. One’s life span is an unknown so this seemed the appropriate plan for me.
Don’t forget that you have to(I have) have paid taxes on the S.S. checks so you are paying back 100+%?
Gummi: If you have been getting social security some of that was taxed for many people since Clinton introduced the ss tax. What of the taxes you paid and do you get any kind of tax rebate on the $84,000 you return to soc sec?
The other question had to do with logevity. I had parents who lived to avg 90 and I try to stay in good shape. The computation I did shows me coming out ahead after I reach 77 or 78.
I have no idea what that tax implications are, good or bad. I bet they’re complicated, though!
And yes, as with all this kind of stuff — Annuities, Social Security, all the other decisions you typically make at some point in your 60s, a major key is your longevity — the one thing you probably can’t control, or even understand very well. As with every other really important question, the statistics mean almost nothing once you get down to the individual level, but they’re the best we got.
Imagine, for example, that you hear that 1% of people have a deathly allergic reaction to chocolate that comes on suddenly and without warning (just making this up, of course). That means nothing — what’s 1%? No worries! At least, it means nothing until you realize that you’re hosting a party for 100 people and serving chocolate cake — is one of your guests going to die?
Knowing that you’ll “probably” live to 85 is not that comforting if you think that you might “win” and live to 100 and be vital and energetic … and homeless, and broke. Actuarial tables are great for planning, and great for populations — for individuals, they’re sometimes less comforting.
Again, I’m not a planner and I’m certainly not qualified to provide retirement or tax advice, just sharing my thoughts.
HI all
Agree with many comments so far- I started SS at age 62 and invested it – minus the tax I had to pay. Am still investing it at age 75 and yes paying taxes on it. Plus my wife started getting spousal SS at her age 65. We don’t use any of the SS income for expenses – Sure I could give a lot back and immediately start getting more each month – But the amount required to give back is money we HAVE and will will to someone – but if we gave it back there is no likelihood we would ever get that much back over remaining life and for sure we would not have that sum to will to anyone. We would simply pay a lot more income taxes on the increased monthly SS payment also. We have certainly gained more from the years of investment also. This is just another one of the Sjuggerand doubtful schemes.
best wishes
john
The SS decision can be looked at in the same vein as taking money from an IRA. Most people put off making withdrawals from IRA accounts until the IRS says the gotta. These people are the same ones who ignore taking out insurance for long term care, because it is too expensive, or it will only happen to the other guy.
If you take social security at 62, there is no law that says you cannot use it to dollar cost average into the mutual fund of your choice. Doing so adds to the net worth that you control, and can leave to your estate if you do not use it later for income. How much of your social security check will your heirs receive?
Regarding IRA withdrawals, take them as soon as you are eligible. Pay the taxes on them at todays’ tax rates and use the income either for protecting against deteriorating health or to set up an investment account that will not be eroded by increased income taxes in the future.
No need to do a spreadsheet to determine whether to take early SS.
Use the one the government provides at
http://www.ssa.gov/oact/quickcalc/when2retire.html
Sorry about the wrong address, use http://www.ssa.gov/oact/quickcalc
The information published by the Social Security Administration says that a person who begins payments at 62 will have a higher total cash amount than if (he) had waited until ‘full’ retirement age with the understanding that the larger payment started later (without penalties) will reach the break-even point in about seven years. Beyond that the “Full Retirement Age” option will generate an increasingly higher total cash benefit.
Life expectancy is dealt with often in published discussions about Social Security, as in a publication by AARP, for example. One member of a marriage is very likely to reach or exceed ninety, barring specific kinds of health problems like heart diseases or cancer where those problems existed well prior to reaching SS retirement age. A person who is healthy at 60 will probably reach 85 or more. As mentioned by Gumshoe, one person is always a wild card. Statistics only work with large populations.
A close friend waited to recv his ss income – wanting his full benefit- expired before recvng a single dime. This puppy will start the day he is eligible, God willing. I would rather mow lawns than die b-4 66 and get nothing back.
the biggest problem is determmining what you received. unless you kept all your tax returns for the years in question there is no place you can go to for that number. SSA does not offer any information on past payments (I’ve tried and gotten nowhere).
This comes from the cynic in me not the CFP part – Take the bene as soon as you can. The Social Security system is a mess. With all of this credit crunch joy, there will be no money for SS since it is a pay as you go system. I believe we have no choice but to raise the age where you are able to take benefits. I also believe it will be means tested. That is – the fine folks on this Website that maxed out their 401(k)’s, IRA’s, Roth, etc, will not get SS benefits. How is that for a redistribution of wealth?
I just hope SS lasts for 5 more years when I turn 62.
Thinking about this, I don’t know if it’s a good idea or not. Everyone will need to make up their own minds based on their situation however –
I don’t see why the government would want to close this loophole. If people started taking advantage of this, social security would get a financial boost and, in effect, people would be giving them the money for their own benefits for the next – maybe – 4 years.