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In a pair of Wall Street Journal articles in mid-2007, Kelly Greene described the advantages of returning the Social Security benefits a person had already received—then reapplying for higher benefits at age 70. Her discussion focused on people who had filed early for benefits, with 62 the earliest possible age to file.
However, a payback strategy also appears advantageous for people who had filed for benefits at “full retirement age,” typically at 65 or 66.
As someone in this latter category, finance professor Neil Holden therefore decided to explore the options and take notes on the process. His experience is described in detail in the current issue of AIER’s Research Reports, dated November 2, 2009.
As background, the longer you wait to claim benefits, the higher your monthly and annual payments will be. Consider the example illustrated on the Social Security Administration website (www.ssa.gov). It refers to people born between 1943 and 1954, many of whom are now retiring early because of the recession. As the chart demonstrates, if a full-retirement benefit equaled $1,000 at age 66, people who filed at 62 would receive only $750, or 25 percent less. This is one example of how waiting to file will provide you with larger monthly and annual benefits, provided you are healthy and can afford it.
Click here to enlarge chart.
After the full-retirement age, the gains from waiting to file are even larger. From then until 70, each year of waiting increases benefits by 8 percent. Postponing the filing age from 66 to 67, for example, yields a comparative value of $1,080, or 8 percent more than the $1,000 base amount pictured in the chart.
That step-up continues at the same rate of increase until age 70. Then it stops. By the same token, the optimal age for the repayment-reapplication strategy appears to be as one turns 70. After that, benefits do not increase and any additional benefits will have to be repaid.
To estimate the figurative “return on investment” from a payback, the author needed to find the annual increase in benefits received, as a percentage of the total dollar payback required.
The precise Return on Effective Repayment was (at least) 8.65% for Professor Holden. Since the repayment is fixed at the nominal repayment and benefits are indexed for inflation, it is a real return. Given that inflation is a major risk for retirees, this approach is an attractive element for retirees’ financial portfolio.
This article has been adapted from a longer article in the latest issue of Research Reports. Details on the process (and a timeline Professor Holden uses to document the steps in the process) are available free to AIER subscribers or $2 for non-members. Also in this issue:
- Business Cycle Conditions - November 2009
Our leading indicators point to probable expansion, but long-term trends foretell a rough road ahead for employment.
by Polina Vlasenko, Research Fellow
- The Un-COLA
Declining prices may mean two years without cost-of-living adjustments to Social Security. But this isn’t necessarily a bad thing.
by Polina Vlasenko, Research Fellow
- Ask the Expert: Homestead Protection
Homestead declarations can protect assets, but not from government claims.
by Attorney Steven J.J. Weisman
To subscribe to AIER Research Reports, please become an AIER member. Membership starts at just $39 per year.
Already a member? Keep your eye out for the October 5 issue of Research Reports hitting your mailbox or inbox soon.
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