Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, September 17, 2010

When Should You Start Taking Social Security - Part II

Our last blog (Part I) discussed the various issues involved in deciding when to start taking your Social Security benefits. This blog discusses how those who already started to receive Social Security can potentially increase their lifetime benefits by “resetting” those benefits.

We believe that most people have never heard about resetting Social Security benefits. So what’s involved? To reset your Social Security benefits, you basically pay back the government all the benefits you’ve received as of a certain point in time. This is called a “Withdrawal of Application”.

To initiate this process, you must file form SSA-521. You can obtain a form online. The instructions on the form state: “This procedure is intended to be used only when your decision to file has resulted, or will result, in a disadvantage to you”. It’s not clear what criteria the Social Security Administration applies in approving a Withdrawal of Application, but if a withdrawal results in potentially increasing your lifetime benefits, it seems like that should be reason enough. At some point in the future, you would then re-apply for Social Security and begin receiving larger benefits based on your then current age. Obviously, the longer the period since you originally applied, the greater the benefits will be.

Once the request is approved, you are required to pay back all benefits previously received. No interest is charged on the repaid amount and your Medicare status is unaffected. You will receive a form SSA- 1099 that indicates a negative net benefit amount. You can either deduct the back taxes or receive them as a credit on your current year’s tax return.

An obvious question is: under what circumstances does a reset of Social Security benefits result in greater lifetime benefits? We noted in our last blog that actuarially, the present value of the stream of benefits you receive should be the same regardless of when you start taking payments, assuming you live to your projected life expectancy.

Those who believe that they may live substantially longer than their expected life expectancy because of their health and family longevity history, may well benefit from a reset. Additionally, married couples where the lower-income spouse is significantly younger (or healthier) than the other major wage earner of the household, may find a reset to be of value since the increased benefit can continue as a larger survivor benefit through to the life expectancy of the younger/healthier spouse.

In an article in the Journal of Financial Planning titled “Social Security Reset: When Does it Make Sense?”, by Charles Ryan, CFP® (June 2010), Mr. Ryan also points out that: “After repaying benefits, time must elapse before the retiree breaks even on the transaction.” If the retiree dies earlier than expected, the benefit of the reset may be lost.

Mr. Ryan also points out in his article that retirees who are considering the purchase of an immediate annuity may find that they will receive a much greater benefit amount if they use the cash they have on hand to fund a reset of their Social Security benefit.

If you think a Social Security reset may benefit you, we strongly urge you to seek professional advice before filing out an application.


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