Financial Planning Blog

Although many economists and financial planners encourage people to wait until full retirement age or later to start taking Social Security retirement benefits, there are circumstances where it is financially prudent to apply for benefits early. In Part 3, some of these situations are discussed, and two more opportunities for taking benefits early are summarized below.

Effective use of the spousal benefit: Imagine the situation of a couple where both plan on maximizing their benefits by waiting until age 70. (They had been reading financial planning blogs, and thought this sounded smart.) They can accomplish this goal of maximizing their long term benefits, and take some benefits earlier, too! Here's how. Suppose the husband reaches his FRA (full retirement age) first, and he "claims and suspends" as discussed in Part 3. When his wife reaches her FRA, she is able to apply for spousal benefits (only spousal benefits, not benefits on her own record*) and immediately start receiving 50% of her husband's PIA. At age 70 the husband claims his enhanced benefit, and when the wife turns 70 she switches from the spousal benefit to her own higher benefit.

If a lower earning wife had chosen to take her benefit at age 62 (as discussed in Part 3) a related strategy could be employed. Since she has claimed her benefit, her husband is able to claim a spousal benefit off of her record. As long a he waits until his FRA, he can claim this spousal benefit (50% of his wife's PIA). He can receive those spousal benefits for the three or four years it takes for him to maximize his own benefit at age 70, at which time he switches to a benefit based on his own record.

Claim early and pay it back: If you aren't convinced that Social Security is not just more complex than you ever imagined, but pretty darn wacky also, check this out. Believe it or not, the SSA allows recipients to "withdraw their application" for benefits, giving individuals an opportunity for a "do-over". All individuals have to do is file Social Security Form 521, and repay all the benefits previously received on their earning record-with no interest or penalty. The individual can then reapply for higher benefits, as if they never received the early payments.

If you have not connected the dots--this amounts to an interest free loan from your fellow citizens. You can take benefits at age 62, invest them, and eight years later pay back the benefits you have received. At age 70 you restart taking your benefit, which has been enhanced with delayed retirement credits. Wow--I'm not making this up. Here is an article, and another, that discuss this option. Of course, just like a lot of things--just because you can doesn't mean you should do it. Here are some things to consider:

• To state the obvious, you better be disciplined enough to have the money put aside to pull this maneuver off.
• This may be a great strategy for a disciplined single person. After taking benefits at age 62 and banking the proceeds, the person can reassess the situation at age 70. If they think they are reasonably likely to live until life expectancy or beyond, they withdraw their application, repay, and reapply for the higher benefit. If their health is dodgy, and they are unlikely to make until life expectancy, than it makes sense not to withdraw and repay.
• For married couples, it is not so simple. As has been previously stated, it is usually wise for the higher wage earner to wait until about age 70 to take benefits, in order to maximize survivor benefits. If the higher wage earner takes benefits at age 62, with the intention of taking the "do-over" at age 70, the couple takes a significant risk. If the higher wage earner happens to die prior to the "do-over", the surviving spouse is left with a significantly reduced survivor benefit. By going for the interest free loan, the couple really screws up.
• Income taxes will likely have been paid on some of the benefits you have received but are paying back. However, you can recover these tax payments in a couple of different ways. (See IRS Publication 915, page 15.) To fully recover your taxes, you will likely have to refigure your taxes for each year you received benefits you are repaying. If you are planning to utililize this strategy, it will be easier if you figure your income taxes with and without your Social Security benefits as you go along.
• If this ability to take an interest free loan from Social Security sounds stupid to you, someone in Congress may eventually catch on. You have to think that Congress will be doing some significant tweaking of the Social Security system in the next few years--right after they fix the whole BCS mess. In the meantime, if you decide to take advantage of this "do-over" provision, make sure you are paying attention. While the SSA or Congress are "under the hood", fooling around with the retirement age, payroll taxes, COLA provisions, etc., they may take the time to fix this absurdity. Even if the provision isn't removed entirely, you would have to think it would be changed to so as not to be so advantageous a loophole.

The decision of when to start Social Security benefits, and how to coordinate benefits between spouses, is one of the biggest financial issues many folks face today. Unfortunately, many make these choices without adequate understanding or guidance. It pays to do your homework, or seek out competent financial planning advice. The complexity of the Social Security system is truly amazing, but provides some interesting opportunities for the knowledgeable. 

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 *Prior to reaching full retirement age (FRA) when a married person applies for benefits it is assumed that the person is applying for both a benefit based on their own record and a spousal benefit. (It is subject to something called a "deemed filing" provision.) After reaching FRA, however, the rules change and a person can select whether they receive a spousal benefit or their own earned benefit.