Free Hindsight – THIS LOOPHOLE HAS BEEN CLOSED

WHAT SHOULD YOU TELL YOUR PARENTS ABOUT SOCIAL SECURITY?

Should they start taking benefits early, at age 62? The downside: the monthly payout is only 70% or 80% of what they’d get if they waited until full retirement age (roughly 66, depending on the year they were born).

Should they wait all the way to age 70? They’re rewarded with an even higher monthly pay-out. But what if they die three weeks later? How dumb will they feel then? (Though dead, I’m telling you: they will feel like idiots.)

If they’ve already begun taking benefits, should they give them back? It turns out you can do that – and should seriously consider it.

(I’m framing this in terms of your parents, but if you’re 85, you might want to forward this to your kids. And if you’re 62 or so yourself – well, I just don’t believe it. You look much younger.)

I always used to assume it was best, if you could afford it – and had no serious health issues you knew of (like, say, smoking) – to wait as long as you could, thereby to get a much higher monthly pay-out for the next 30 years.

But it turns out there’s a strong case to begin taking the dough at 62, because you’re allowed to give it back, if you choose, and ‘reapply’ at a later age for then then-prevailing benefit.

So say you start taking the payments at 62 and, come age 70, you’re dead. Aren’t you glad you didn’t wait?

Or say you’re alive and kicking, but – how to put this nicely? – you’re not getting any younger. (Benjamin Button you are not.*) So it may still be a pretty good bet that, with hindsight, your grieving heirs will say, graveside, ‘He was a heck of a golfer, a terrific husband – and was he ever smart to start taking his Social Security at 62!’

*I can suspend disbelief to allow for his having been born a ninety-year-old who grows progressively younger. But it is simply beyond imagining that he would not have been besieged by newspapers and medical researchers probing him every which way to discover the secret of reverse aging, don’t you think?

But what if, at 70, you’re feeling terrific and might even outdo your own mother, who lived to 97, and your own dad, who only just barely predeceased her? It could well make sense to pay back all the benefits you received and start taking a much higher monthly benefit instead. Long before your 97th year, you will have come out ahead. And if we do wind up living forever (click here) . . . well, you get the idea.

This strategy is complicated by taxes and other factors discussed in Forbes (you may have to click the link more than once to push past the advertising). But the basic idea is pretty simple: Imagine you take the checks every month for eight years, deposit them in a savings account, and then at 70 (having kept the interest), you get that rarest of all things – the benefit of hindsight. If you say to yourself, ‘Gee, I wish I hadn’t settled for that puny early-benefit option at 62. I should have waited to 70’ – then you can change your mind! Just fill out Social Security Form 521.

You have to pay back all the benefits you received, but no penalty or interest. And yes, some of those benefits were taxed along the way; but you get a tax deduction for the benefits you return.

The Social Security Administration is aware that this strategy is catching on, and recently studied it – quite thoughtfully – here.

It’s always possible they will shut it down; but even if they did, they might well grandfather in those who had already begun taking benefits. And even if they didn’t grandfather those grandfathers, isn’t the real risk then simply that they will live a very long time (and thus have been better off not taking checks at 62)? I can think of worse things.

Note:

• I’ve been using age 62 and 70 in my examples, but you might also decide to reset your application at age 66 or 67 or 68 or whenever.

• All the checks, whenever you decide to start taking them, are slated to increase with inflation.

• If you’re married, another strategy to consider: The lesser-earning spouse starts taking checks early, at 62. Then, when the higher-earning spouse applies at full-retirement age (or even waits to 70), the lesser-earning spouse can opt to take a check equal to 50% of the higher-earning spouse’s benefit – i.e., for a combined total of 150% of the higher earning spouse’s benefit.

• To play with Social Security benefit calculators, click here.