You wouldn’t think that something as simple in principle as Social Security benefits would require much thought or strategy. But just like many things associated with the government, it’s never quite as simple as it seems.
I will admit that this is not an area of expertise for me. But recent questions by clients and some articles in investment industry publications have brought me a little more up to speed. I will also add, before getting into specifics, that there are probably no major mistakes to make in your decision on how or when to take Social Security Benefits. The big unknown for the majority of us is how long we will live to collect the benefits and with that variable unable to be answered with certainty, the decision ends up coming down to gut-feeling in most cases.
One strategy I was unaware existed until recently is being dubbed the “Do Over.” It involves paying back the Social Security system all of the benefits you have received so far, then re-applying for benefits (either immediately or down the road depending on your age) to obtain a higher monthly benefit. This generally would be considered by those who started receiving benefits at age 62, or perhaps 65 and who can now receive a higher benefit due to being older, or who can now afford to wait to receive their benefits at a later date. Social Security benefits rise by 7 to 8 percent for every year of delay in starting to receive them.
While paying back the money previously received may be initially an unattractive thought, you can do so without any interest or penalties, and you can even claim a tax credit for any income tax previously paid on those benefits. The key in this decision is the belief that you will live long enough to receive more in increased benefits than the money you have to pay back. Of course, there is an opportunity cost to paying back the government with funds from your investment accounts, since those funds would likely make some income or profit over time. For some there may not be a choice here because you have to have the money in one lump-sum to initiate the Do-Over and that’s just not possible for some retirees.
Those who want to consider paying back the system and starting over may need to act quickly. The Office of Management and Budget is currently reviewing whether to limit the ability to start over to those who have been collecting for less than 12 months. The main key to making this decision favorable in light of the big unknown of life expectancy is your age and a reasonable assumption of how long you may collect after starting over.
The Social Security Administration can help you calculate how long you have to receive the new, higher benefit to break even, So I suggest giving it a call to go over your personal situation.
Another strategy is called “File and Suspend.” This works best for couples where one was the major breadwinner, and where maximum benefits are not needed at the moment. The spouse with the largest benefit files to start receiving it, and the other files for spousal benefit. Then the breadwinning spouse suspends receipt of his/her benefits while the smaller spousal benefit is continued. The spouse with the larger benefit then re-files to receive larger benefits down the road, say at age 70. If one souse passes away, the other is entitled to the larger benefit of the two.
There are some other considerations and strategies to consider, and talking with a representative of the Social Security Administration to get the facts and figures germane to your situation is the first step. Consulting a qualified tax preparer or financial consultant to review your options comes next, followed by making a decision based on your age and potential to defer benefits or have a reasonable chance to come out ahead.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.