My sister Carol Dunlevy just called me and asked if I was getting
Social Security. Well, yes I am. At 62 feeling old, I took the payments and have felt younger all the time.
Well, Carol has heard that if you want to repay
Social Security all of the money you have received to date, that you can reapply and get a larger monthly payment. When you take the payments at 62, I had believed that was it for the rest of your life.
Now, I find out that
Social Security form 521 (Request for With drawl of Application) permits you to:
1.Repay the
Social Security retirement and other family benefits received on your earnings record with no interest required and no adjustment for inflation
2.Reapply for benefits from scratch & deduct the repayment on your income taxes or take a tax credit for the taxes you paid in the past on the
Social Security benefits you received in the past
Not knowing about this possibility that the
Social Security 521 form can bring, leaves a huge gap in our financial planning.
This is a complicated issue. I have a website here which I am adding to my post. I plan to keep adding this issue once a month.
Reapply for Social Security
Raise Your Living Standard
Peter and Kate are 70 year-old retirees. They have $200,000 in regular assets and $200,000 each in retirement accounts. They invest all these regular and retirement account assets in safe assets yielding 3 percent after inflation. Peter and Kate will each receive $13,250 this year in
Social Security retirement benefits.
Peter and Kate are happy, yet sad; they’re kicking themselves for taking
Social Security early. Had they waited until now to apply, they’d each be eligible for $20,693 per year their full retirement benefit adjusted by
Social Security’s Delayed Retirement Credit; i.e., they’d be receiving 56.2 percent more in real
Social Security benefits this year and every year they live into the future.
Recently, Kate read Janet Novacks article in Forbes Retirement Guide about a little-know option reapplying for
Social Security. As Novack relates,
Social Security form 521 (Request for Withdrawal of Application) permits you to a) repay the
Social Security retirement and other family benefits received on your earnings record with no interest required and no adjustment for inflation and b) reapply for benefits from scratch. Better still, you can deduct the repayment on your income taxes or take a tax credit for the taxes you paid in the past on the
Social Security benefits you received in the past.
When we ran Peter and Kate through ESPlanner we found that repaying and reapplying raised their living standard – their sustainable consumption expenditure -- by 21.7 percent notwithstanding their each having to repay $94,556! How else could Peter and Kate raise their living standard by 21.7 percent? Well, they could find $220,000 lying on the street. With $420,000 in regular assets rather than $200,000 they’d be able to sustain the same living standard through age 100 as simply repaying and reapplying for
Social Security -- something that will take them all of an hour.
How much one gains from repaying and reapplying for
Social Security is sensitive to one’s circumstances. In Peter’s and Kate’s case, were they to have zero retirement account assets, their living standard gain would be 29.0 percent!
What Age Groups Stand to Gain from Repaying and Reapplying?The table below considers how Peter and Kate would fare from repaying and reapplying for different current ages. The results for age 70 are those just discussed. The results for the other assumed initial ages indicate that households ranging from their mid 60s to mid 70s may gain significantly from this option. For example, if Peter and Kate are 76 years old, their sustainable increase in consumption spending is 8.9 percent. This is smaller than the 21.7 percent gain they’d enjoy were they 70 years old because they have to pay back more benefits and have fewer years remaining (to their maximum ages of life of 100) to enjoy the higher benefits. Still, enjoying a permanent 8.9 percent living standard rise for essentially no effort is a major opportunity for the 76 year-old Peter and Kate.
Beats Buying a Commercial AnnuityThe $94,556 payment can be viewed as the price of buying from
Social Security an annual inflation-indexed annuity of $7,443 ($20,693 less $13,250). The best priced inflation-indexed annuity on the market is offered by The Principal Insurance Co. via
www.elmannuity.com. Buying an $7,443 annuity from The Principal would cost about 40 percent more. Were Peter and Kate to each purchase annuities paying $7,443 after inflation, they’d enjoy a 10 percent higher living standard. This shows two things: buying inflation-indexed annuities from a reliable low-cost provider can raise ones living standard. But buying such annuities from the safest and lowest cost provider, namely,
Social Security, can raise one’s living standard by a lot more.
Too Good To Be True?This seems too good to be true. After all, there are millions of retirees in their mid sixties to mid seventies who could potentially significantly raise their living standards by withdrawing and reapplying. Yet, from our checking with local
Social Security and discussions with top
Social Security officials, approving this request is routine. If you go to the office, fill out the form, hand them a check, you can then reapply on the spot and start receiving the higher benefit.
Social Security’s attitude is that this is a legitimate option for people to consider and if it makes them better off financially, they should use it.
Repaying
Social Security and reapplying for a higher benefit does, of course, entail risk – the risk of dying right away and not living long enough to recoup this investment. But the big risk, financially speaking, is not dying early, but dying late—living longer than one expects and, as a result, running out of money. Annuities, particularly inflation indexed annuities, are a marvelous way to hedge this very significant risk.
To read
Social Security’s Handbook’s discussion of this option, go
here. To download the form, go
here.
Should One Take Benefits Early and Plan to Reapply? If you’re 62 and retired, should you take benefits early with the intent of repaying and reapplying at a later age? Our answer is yes, but. First, your benefits will be subject to federal income taxes depending on their level and the level of your other taxable income. However, as mentioned, according to page 15 of IRS Publication 915 you can recover such tax payments at the time you repay your benefits by either a) deducting the benefits you repay in the year you repay them (i.e., by including them with your other itemized schedule A deductions) or b) figuring out the extra taxes you paid each year in the past on the past benefits you are paying back, add them up, and taking them as a tax credit. Whichever method results in lower taxes is the one you get to use. You'll lose interest on the tax payments, but that's not likely to outweigh the considerable advantage of repaying past benefits and then reapplying for a higher annual benefit. So taxes are not a reason to avoid taking benefits early and then planning to repay and reapply, say, at age 70.
The real question here is whether the government will decide to close down or make more costly the option of repaying and reapplying before you have a chance to do so. So far our discussions with the Social Security Administrations suggests that
Social Security itself is only too happy to maintain this policy if it can provide retirees with a higher living standard. On the other hand, if
Social Security starts getting hundreds of thousands of requests to repay and reapply, it may start to realize that not requiring repayers to pay back with interest, let alone actuarial interest (which is what should be charged), is costing the government money. At that point, someone in Congress may move to close down this option or require that repayment include actuarial interest charges (which are higher than regular interest charges). Assuming the option remains in place in its current form, you can use ESPlanner (see this
forum topic) to determine the advantage of taking benefits at 62 and then repaying and reapplying at 70 compared to, for example, simply waiting until 70 to take benefits. If you do decide to take benefits early with the intent of repaying and reapplying, we recommend you fill out, but not file, a separate tax return each year that does not include your
Social Security benefits. The difference in taxes on this extra return and the actual return you file represents the extra tax payments you'll be able to recover as a tax credit when you ultimately repay and reapply. Keeping your past actual tax returns and these annual alternative returns will provide you with documentation to substantiate the tax credit.
The Gain from Taking Benefits at 62 and Repaying and Reapplying at 70We’ve also calculated for Peter and Kate, assuming they are now age 62, the gains with respect to sustainable consumption of taking their benefits at age 62 and then at age 70, repaying them and reapplying for higher benefits. In these calculations we’ve permitted Peter and Kate to borrow as needed to smooth their living standard. Taking their benefits at age 62 and never repaying entails a sustainable consumption level of $50,410. Taking their benefits starting at age 70 offers an 11.8 percent higher level of sustainable spending. But taking them early – at age 62 – and then repaying and reapplying at 70 offers an even better deal – a 15.8 percent higher sustainable spending level than simply taking benefits at age 62.
Calculations based on ESPlanner (
www.esplanner.com). Illustration assumes a married couple living in Massachusetts with $200,000 in regular assets. Each spouse has $200,000 in a 401(k) account. Maximum age of life is 100. Couple has a $300,000 home with $3,000 in annual property taxes, $1,000 in home owners expense, and $1,000 in annual home maintenance expense. Couple is enrolled in Medicare and pays Part B premiums, assumed to rise at a 4.6 percent real rate each year. Couple earns 3 percent after inflation on its assets, including its retirement accounts.
1. “
The 62/70 Solution,” Forbes Retirement Guide, November 11, 2007.
2. The
Social Security Administration has to approve the application and requires applicants to provide a reason for the request. The form let’s you check off one of two boxes as the reason. The first is “I intend to continue working.” The second is “Other.” If you check “Other” you need to provide a reason in the space below the box.
3. Read
Social Security’s Handbook’s discussion of this option
here. Download the form
here.
SEE:
http://www.esplanner.com/Case%20Studies/double_dip/double_dip.htm
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