Oklahoma seniors can restart the clock on Social Security

BY PAULA BURKES

Published: November 16, 2008

Did you decide to draw Social Security at age 62 and now wish you’d waited on a bigger check? There’s a little-known tactic that allows recipients to pay back all they’ve collected interest-free and restart their benefits at higher rates.

After personal finance writer Mary Beth Franklin of Kiplinger’s magazine recently wrote about the strategy, retiree Dan Cowles, 67, of Cumming, Ga., decided to repay $84,000 in past benefits and reapply when he turns 68. His monthly benefit will go from $1,580, which was reduced 25 percent for early withdrawal and adjusted annually for inflation, to $2,425.

"Many retirees will be happy to learn that choosing when to start collecting Social Security benefits is not an irreversible decision,” Franklin said. People are living longer, so they’re working longer and delaying collecting benefits to let them grow, she said. Benefits increase 8 percent for every year past normal retirement age (65 to 67 for people born 1938 and later) to 70, where recipients’ monthly check is 132 percent of full retirement age.

Recipients who delay collecting also give spouses larger survivor benefits when they die, Franklin said. As survivors, spouses may be eligible for the deceased’s full retirement benefit.

Cowles decided it was worth it to pay back the benefits he collected to get a larger monthly check, and higher survivor benefit for his wife. He basically "bought” an additional $845 a month in inflation-adjusted income, Franklin said.

"That’s nearly $100,000 less than it would cost to buy an inflation-protected immediate annuity with a 100 percent survivor benefit from a low-cost annuity provider, such as Vanguard,” she said.

One retiree took out a home equity loan to repay what he’d collected. He used the extra income from his bigger monthly Social Security benefit to repay the loan, enjoying a tax deduction on the interest he paid.

Retirees who repay Social Security benefits can claim an itemized deduction or tax credit (whichever results in bigger savings) for the taxes they paid on their benefits in previous years. (See IRS Publication 915)

Not for everyone

Though the payback strategy may work for some, financial planners warn retirees are taking a risk by betting they or their spouses will live long enough to reap the benefits.

"It may take 10 years, or more, to recoup the money,” said Michael Bast of Retirement Investment Advisors.

In more than 16 years with Social Security, Larry Jones, public relations specialist in Oklahoma City, has never seen a retiree restart the clock on their benefits.

"Very few have that kind of money to give back to the government,” Jones said. "You’re starting over at ground zero, and it may take you several years to catch up.”

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