Q: I'm researching the best time to start Social Security benefits. I'm curious if you considered filing for benefits as soon as possible, investing the money and then filing for a withdrawal of application and reapplying for benefits at age 70?
You would have to repay all benefits received between the time you started taking them and age 70. However, you would keep all the investment earnings, and by reapplying at age 70 you would be eligible for the maximum Social Security benefit for life. It's also possible to get some refund of any income tax paid on the benefits received up to age 70. This is an interesting strategy I am considering when I turn 62 in three years.
A: It is indeed interesting and quite legal, although if you ask at your local Social Security office, the employees there may not always be aware of it.
In essence, Social Security regulations allow you to suspend benefits, pay back all the money received up to that point and then reapply for benefits.
By reapplying, you're entitled to the higher benefits you normally get at an older age. (You can start receiving benefits at age 62 but you would get the lowest amount. For every month you wait to apply until age 70, your benefit is increased.)
Rather than simply wait until age 70 to apply, this strategy amounts to "borrowing" benefits between age 62 and 70 and repaying them without interest at age 70.
If you live to a normal life expectancy, the higher benefits you'd receive starting at age 70, adjusted for inflation each year, would more than make up for the money you had to return. As a bonus, you would also get to keep all your investment earnings.
For a thorough explanation of the strategy, check the case studies about "When Should I Take Social Security?" at www.esplanner.com, a Web site developed by Boston University professor Laurence Kotlikoff and other economists. You find the case studies by first clicking on the "Learn More" link at the site.
There are risks to the strategy, of course. An obvious one is dying shortly after reapplying for benefits and giving back all the benefits previously received. There is no guarantee you'll turn a profit by investing the benefits received between age 62 and 70. And maybe at age 70 you can't afford to return the money, leaving you with the lower Social Security benefits for life.
Also, if you can afford to invest your Social Security benefits between ages 62 and 70, chances are your income is high enough that you'll have to pay taxes on up to 85 percent of them. Eventually you can deduct the repayment of benefits on your tax return, or claim a credit for taxes previously paid. But aside from this "hassle" factor, there's always the risk that tax and Social Security rules may change before you turn 70.
"If too many people trade up for higher benefits, Congress might change the law," said Robert Carlson, an investment adviser in Fairfax County, Virginia, and editor of the newsletter "Retirement Watch." About 100,000 people a year suspend benefits, return the money and reapply for higher benefits. If many more start doing it, raising the cost to the government, the rules may change, Carlson said.
His advice, which I find logical, is that people who had already started to receive benefits early should consider whether the strategy makes sense for them as they approach age 70. But deliberately beginning benefits early with the intention of suspending and reapplying later is more risky.