That was the way that a conversation started with one of my clients a few months ago and it really caught me by surprise. Sure he was calling me to solicit an opinion, but the problem was that he was calling me about a matter within the Social Security program to which I was completely unfamiliar. Now to be right upfront, as I was with the client, the details of the Social Security program is not one of my strengths. So in this case I actually got to learn something from the client. Somewhere he had stumbled on to this information and followed up on some resources to validate the ability to withdraw from the system, pay back all the amount that he had received, and reapply for a higher benefit.
With my newfound awareness of this tool in my financial planners toolbox, I made it my business to research the issue further to understand some of the implications of executing the strategy. Interesting also, was the fact that it surfaced in one of the workshops that I attended last week at an annual financial conference that I go to.
So my early due diligence validated the obvious question….does it really work? The answer is yes it can under the right circumstances and it is totally legal and allowable under Social Security Administration guidelines. Alright, what is the right situation to consider the strategy? Assume an individual began taking Social Security at age 62 which would be 75% of their primary insurance amount known as the PIA. At age 70, and with all indications being of good health, a reapplication to Social Security benefits might reap them a monthly check of 132% of PIA. So in order to get that amount all the dollars received since the age 62 start date must be repaid. It should be pointed out here that the payback is made without interest. So essentially the payback can be looked at as a free loan from the government.
But remember I raised the caveat in the preceding paragraph about being of good health. The reason being that with the lump sum repayment to make the strategy work it will require a recovery of those same dollars through the higher new monthly checks before getting into the bonus dollars as I would refer to it. So obviously for someone with any serious health condition it probably would not pay to play the odds of getting more money in total from the system.
Additionally, there are other issues that need to be considered to make a prudent decision on follow through. Don’t forget that for many individuals income taxes have been paid over the years on up to 85% of the social security received. The recovery of those taxes would be necessary to come out whole in the overall exercise of the plan. That in itself could require a bit of work.
So summing up, withdrawing and reapplying to social security is not a guaranteed solution for increased income for everyone. But it does warrant the proper review when individuals had elected to take early social security benefits.
