Social Security: A Do-Over Could Boost Benefits

If you're 62 to 70 years old and currently receiving Social Security Retirement benefits, it could make sense to reconsider your Social Security retirement benefits.

The transaction, called a Social Security "do-over", is where you repay past amounts received from Social Security and then restart your Social Security benefits.

The Social Security Administration allows folks to start drawing benefits before full retirement age, as early as 62. If you take benefits before your Full Retirement Age you will receive a lower monthly payment than had you waited until age 65, 66 or 67. And if you delay taking Social Security benefits until age 70, your full/unreduced benefits would be further increased by a delayed retirement credit. Once you reach age 70, Social Security benefits are not increased for delayed commencement, so beginning befits after age 70 doesn't make financial sense.

Under the "do-over" option, you can request to halt benefit payments, return them in total and restart benefits at your current age which would result in a larger monthly payment. Depending on your circumstances, the larger payment could be 32 percent higher or more.

Here's how it works:

• Anyone over 62 already receiving reduced Social Security retirement benefits can file Form SSA-521, "Request for Withdrawal of Application." Expect Social Security to take several weeks to process your request.
• When your application is accepted, you'll have to repay the gross amount of all previously received Social Security benefits in one lump sum.
• Apply for Social Security benefits to begin at your current (or a later) age at the new, larger monthly payment.
• As for the income taxes paid in prior years on those repaid benefits, in most cases you can file an amended tax return to get most of that back in the form of a deduction or a tax credit. You'll need to read IRS Publication 915 and should consult a tax adviser.

But this transaction doesn't make sense for everyone, especially if you're not in good health. The catch is that you have to repay all the benefits you've received upfront. Then you'll need to live long enough while collecting the larger monthly payments until the difference received equals or exceeds the lump sum you had to repay. It's typical that it would take about 13 years to reach the break-even point. So if you do this at age 70, you'll have to live to 83 just to break even and live longer to profit.

But there is a hidden benefit to this move. Your spouse might qualify for a higher widow's benefit upon your death.

To be clear, a Social Security "do-over" is not the right move for a lot of folks.

You have to have a large amount of cash available to repay benefits in a lump sum. Depending on how early you began collecting benefits and the monthly amount received, this could be as much as $95,000, or more.

If you die too early - before the break-even point, say age 83 - the increase in monthly payments won't offset the amount repaid upfront.

You also need to bake into the analysis a reasonable rate of return you could earn on the lump sum you'd have to hand over to repay the benefits. If that's over 5 to 6 percent per year, then you might fare better to not do this.

This transaction is a lot like buying a fixed immediate annuity. You hand over a lump sum and in return, an institution offers a guaranteed monthly income stream for life. In this case, you are getting an inflation adjusted annuity which is guaranteed by the United States Government. That's the most secure guarantee you can get.

The bottom line: You definitely need to run the numbers on this transaction carefully and there are a lot of factors to take into account. My advice is that you don't go it alone. Hire a CPA or a fee only financial advisor to run the numbers before pulling the trigger.

Ray Martin

View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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