The Ultimate “Do Over”

We’ve talked about it before – the decision of when to begin taking your Social Security retirement benefit is very important.  (you can see my post on the subject here)  The problem is, sometimes we aren’t in a position to delay receiving the benefit… or maybe we didn’t consider what a difference it would make to delay taking payment (it’s substantial).

It’s a little-known fact that you can re-set your Social Security payout amount, even if it’s been a few years since you started.  You may have heard of this, but usually discussions have few details on how to do it.  That’s what I intend to provide for you in this article:

Let’s say for example that you had a choice to begin your Social Security payout at your early retirement age of 62, at a reduced amount of $750 per month.  Had you waited until “normal” retirement age (66), your benefit would have been 33% greater, or $1,000 per month.   (For the purposes of simplicity of illustration, the annual cost-of-living increases have not been included in this example.)

Yes, these are real world numbers, and yes, the difference is that great.  So, by the time you have reached age 66, you have received four years’ worth of benefits at the reduced rate, or a total of $36,000.  It is possible for your to re-set your payout to begin at your attained age of 66, instead of continuing at the reduced rate for the rest of your life.

And it gets better, the longer you’ve received the reduced benefit:  From your normal retirement age to age 70, there is an 8% bonus applied for each year that you delay receiving the benefit.  If, in our example, the retiree had waited until age 70, his monthly payout (again, not counting cost-of-living adjustments) would be approximately $1,320 per month.

So how does it work?  It’s fairly simple, once you understand the details – you pay back the Social Security Administration all of the money that has been paid out since you opted to begin receiving the benefit.  That’s it, no interest, no penalties.  Then you re-apply for benefits at your current age.

So – from our example if you started your benefit at age 62 at $750/month, and then at age 66 decided you’d rather have the greater payout – for the cost of $36,000, you will increase your payout by $3,000 per year.  That’s a 8.33% return on your money.  And if the same retiree had waited to do his “do over” at age 70, the cost is $72,000 in our example, but the payout increase is even better:  $6,840 per year, or a 9.5% return on your money.

That works out to better than a 75% increase in annual benefit.  Seems like, as long as you’re planning on living a while, this is a pretty good deal.

The only problem with this whole plan is this:  you can do this once, and it’s not revokable.  So, if you sent in your $72,000 yesterday and accidentally stepped in front of a bus today, your heirs do not get the money back.  However, as is the case with each of these decisions, if you are the higher wage earner and your spouse survives you, he or she will be eligible to receive the increased benefit.

Obviously this isn’t a consideration for everyone, and it may not be an appropriate decision for many that do have the funds available to make such a move, but for some folks in specific situations it can be a pretty good move.  As we mentioned in the earlier article about this, though, as long as you are in good health, the longer you work and wait to start taking the Social Security benefit, the better.  This is especially true for the higher earning spouse.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author