Thursday, December 9, 2010

Social Security shuts down “restart” option

USA Today reports that the Social Security Administration has issued a regulation that effectively limits the option to "restart" Social Security benefits, which has increasingly been taken advantage of by financially-savvy retirees. The restart option allowed retirees to withdraw their application for benefits, repay the benefits they had received, the restart at a higher benefit level.

This strategy had two main advantages:

  • First, the repayment of benefits included no interest, making those benefits effectively an interest-free loan. For instance, a person who had claimed benefits $15,000 in annual benefits from age 62 through 70 could make around $15,000 on the deal, assuming a 3 percent interest rate.
  • Second, individuals who worried about dying before claiming benefits could claim at 62, then restart at later ages. This would give seniors the best of both worlds.

The regulation limits restarts to once in a lifetime and the restart must take place within 12 months of initial benefit claiming. Given these restrictions the strategy probably doesn't make much financial sense anymore, given the general hassle of visiting an SS office and running through the paperwork.

But it could allow someone who claimed at an early age then immediately decided to defer retirement another shot at doing so. There wouldn't be a direct financial benefit, but by delaying retirement the individual would assure themselves an higher benefit later in life and increased survivors' benefits for their spouse.

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