Saturday, February 23, 2008

Social Security Decisions: Important But Not Irrevocable
You Have Much More Flexibility Than You May Think

I have written several times before on this subject, and my basic premise has been that many boomers are making a big mistake by taking social security at age 62, at least those who don’t fall under the three exceptions to the basic rule of “Don’t Do It.” Then on February 1st, I wrote about the ability to UNtake social security by basically suspending payments, stopping the clock as it were, and gaining credits in the form of increased future payments. For example, if you start taking payments at 62, and suspend them at age 63½ for three years, at that point you would be 66½ and earning pretty much as if you had started at 65.

Now comes an article from entitled “Trade In Your Social Security Check,” which describes how you can not only stop the social security clock, but you can RESET IT TO ZERO by paying back all of your previously earned social security checks WITHOUT INTEREST. Which certainly answers one of my original arguments about flexibility. You really can’t ask the Social Security Administration to be more flexible than that.

As the article describes, all you have to do to reset the social security clock to zero is to file Form 521 with the SSA and of course, give them a check. And I was amazed to read that about 100,000 people do this annually. And I have the strong feeling that that number will grow annually as more and more boomers find their “encore careers.” And it will be as if they had never filed. How many financial decisions can you say that about. (Try calling your stock broker and saying, “You know that stock I bought six months ago? I’ve changed my mind.” … but I digress.)

Now if you think this sounds exceptionally generous on Uncle Sam’s part, I agree. And if you’re now thinking that this could essentially be used as an interest free loan, I like the way your devious mind works. You are exactly right. The only fly in the ointment is that the loan you’re getting is considered income and you MAY have to pay taxes on it. Which I suppose creates a Catch-22 … If your income is low enough to escape taxation, then how are you going to pay it back? And if your income is high enough so that a tax problem is created, the taxes may negate the “free interest.”

So let’s look forward, as the article does, because it really isn’t a matter of payback, but rather how much of an increase in income can you buy for how much money. The author gives an example of a couple who took social security at age 62 and are now 70. They are currently receiving $11,556 per year, and have received a total of $79,305 each in benefits over those eight years. By filing form 521, each one can repay the $79,305 and immediately increase their benefit by $8,444 annually, to $20,000. As the author indicates, the cheapest commercial annuity would cost them 40% more. From there, it gets a little more complicated, when taxes are reintroduced into the equation, but I hope you get the idea.

And to tell you the truth, I’m much more interested in the idea of hordes of my readers getting all fired up, maybe visiting, finding their “dream second career job,” pursuing their life’s passion, and NOT NEEDING their social security checks until it’s no longer beneficial to defer taking it, usually at age 70.

And as I write this, I’m sitting with my “Social Security Statement” right in front of me. So let me conclude with some real world numbers … mine:

At age 62, my monthly benefit would be $1383
At age 66, my monthly benefit would be $1845
At age 70, my monthly benefit would be $2425.
So if I can hang in there to age 70, doing stuff I love to do (like writing for you :-) I’ll get over 75% more per month until the day I die. And even if “dream jobs” come and go, Uncle Sam stands ready to turn benefits “on and off” so I can get at least some of that benefit, as circumstances change. Now THAT’S flexibility. :-) Bob


Funny about Money said...

Great post--this one goes intp the bookmarks.

Everyone I know is taking (or planning to take) SS at 62, the theory being that the system is set up to pay out the same amount to you over your remaining lifetime, no matter when you start drawing down payments. The longer you wait to start collecting, the bigger your gamble that you will live long enough to collect enough to matter...especially if you're male. Men friends who have retired early are collecting SS and putting it into mutual funds for use at a later time.

Given the recession (could that read "depression" in the near future?), I'm hanging on to my job, since my investments, lately gaining 12 grand a month, are now stripping the shirt off my dainty little back. The ONLY reason I'm not taking SS now is that it would all be taken away from me because I'm still earning a salary. If I were retired and had enough to live on exclusive of SS, I surely would grab the money and run.

Bob McD said...

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Best Regards