Have Your Social Security and Eat It Too

There are arguments for taking limited social security benefits as early as possible (age 62). Clearly you will come out ahead financially if you don’t live long enough to take them later. You might also argue that you are more likely to enjoy the money as a 62 year old than you would as a 70 year old.

There are also arguments for taking social security benefits later (as late as age 70). You will receive a much larger monthly benefit at age 70 and if you live a long life, this cost of living adjusted (COLA’d) annuity could be very valuable.

Not as many people know about a third option. You can take the limited amount early, then trade if back for the larger amount later. This is a loop-hole that Suze Orman is now touting for her more affluent clients.

From NJ Times, June 16, 2007: “ . . .Suze Orman, a well-known financial adviser who has written many books and appears frequently on TV to promote her books and videos, pushes her own Social Security scheme involving withdrawal of a Social Security claim. She advises retirees to file for reduced Social Security benefits at age 62. She then tells them to invest every nickel of benefits they receive between ages 62 and 66. Then, at age 66, she instructs her clients to withdraw their original Social Security claim. As part of that plan, they have to repay all benefits received. They should be able to do that with no financial problems assuming they followed her advice and invested all the Social Security money they had received.

The good news is that they (her clients) get to pocket the interest. The SSA does not charge interest when they ask people to repay benefits after a claim is withdrawn. And finally, to close the circle on the "Suze Orman Social Security Scheme," she tells her clients to file a new claim for full (age 66) benefits right after they withdraw the old age- 62 claim.

Although it is totally legal, it couldn't work for most retirees. The reason is that most people need the proceeds from their Social Security check to pay the mortgage or rent or grocery bill. Only the comfortably affluent see their Social Security check as merely another investment vehicle."
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Here’s an example of how this might work for someone earning maximum SS benefit if they reached age 62 in the year 2000. The calculation was done by John Greaney (aka intercst) at his early retirement forum.

http://www.retireearlyhomepage.com/cheap_annuity.html

So at age 70, by withdrawing your application to receive benefits that you made at age 62, you would pay $103,685 back to the federal government. You would keep any interest you earned on that money. And you would re-apply for age 70 benefits. This would result in an immediate increase in your benefit of $1,157 per month (over 76% increase). If instead of doing this, you wanted to buy an equivalent inflation adjusted life annuity, you can check costs of doing this with any company of your choosing. According to Vanguard:
Cost of $1,157/month Vanguard inflation-adjusted life annuity at age 70:  $188,264
Savings for doing SS withdrawal of application ($188,264 - $103,685) = $84,579

Taking advantage of this social security loop hole was worth $84,579 after only 7 short years. This does not include money you earned by investing your benefits during those 7 years.

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Here's a link to the form for REQUEST FOR WITHDRAWAL OF APPLICATION

http://www.golio.net/My_Homepage_Files/Download/ssa-521.pdf

You don't have to file an amended income tax return for previous years. You recapture the taxes paid in previous years as a tax credit on Form 1040, Line 70.

http://www.irs.gov/publications/p915/ar02.html#d0e3874

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