Mary Beth Franklin: Undone by the do-over strategy

One of the biggest challenges of figuring out when to claim Social Security benefits is determining which strategy would maximize benefits for a client. The second challenge is to keep up with any rule changes that could undo the initial decision. In the past few weeks, I have heard from two readers who claimed reduced Social Security benefits early because they needed the money at the time. They both planned to repay those benefits later and restart them at a higher amount based on their age at the time. The only problem is they missed the memo that repayment options had changed. Until December 2010, it was possible for an individual to collect reduced Social Security benefits as early as age 62 and at any point up to age 70, to withdraw their application for benefits, repay any benefits they had received, and restart their benefits at a higher rate. Although repayments often exceeded $100,000, it was significantly cheaper than buying an immediate annuity that would generate the same amount of additional guaranteed income. The do-over strategy essentially amounted to an interest-free loan from the government. But the Social Security Administration put a stop to that policy in December 2010. Now, an individual can repay benefits only once in a lifetime and it must be within 12 months of first claiming benefits. One reader named Debera was distraught. She had based her retirement income plan on a strategy to take reduced retirement benefits at 62, repay them at her normal retirement age of 66 at which point she would filed a restricted claim for spousal benefits only on her ex-husband's earning record. Then at 70, she intended to switch to her own retirement benefits which would have earned 8% per year in delayed retirement credits. “The strategy would have nearly doubled the amount of money I receive now,” she wrote to me. “When I called Social Security, I was told that the government had changed its mind and that this option was no longer available,” she lamented. “Is there anything that can be done retroactively?” Within days, I had received a similar e-mail from another reader. Jim is 67 years old and began collecting Social Security benefits at 62 because of cash flow issues at the time. “Back in 2010, finances had improved, and I had made up my mind to file a "withdrawal of application, pay back all benefits up to that time, and restart benefits at a later date,” Jim wrote. “I collected the necessary funds, had a check in hand, and was scheduled for a visit to my local Social Security office when SSA changed rules, disallowing the payback,” he explained. “I was bummed out, but there wasn't much I could do about it.” So are these two readers out of luck? Not necessarily. There is a little-known option that allows individuals who have reached their normal retirement age to voluntary suspend—but not repay—the Social Security benefits they have received, as well as any benefits received on their earnings record, such as spousal benefits. The suspended benefits would earn delayed retirement credits worth 8% per year for each year they postponed collecting their benefits up to age 70. For example, say you are entitled to retirement benefits of $2,000 per month at your normal retirement age of 66, but you elected to claim reduced benefits early at age 62. So you would collect 75% of your primary insurance amount--$1,500 per month. Then you change your mind about the wisdom of collecting benefits early after the initial 12-month window has elapsed. At 66, you could voluntarily suspend your benefits until age 70, boosting your benefits to 99% of what they would have been if you collected them initially at age 66. Here's how the math works: 75% (reduced benefits at 62) x 1.32% (delayed retirement credits from 66 through 70) = 99%. Unfortunately, as a single, divorced woman, Debera may not be able to afford to go four years without a Social Security benefit. But Jim, who said his wife has just reached her full retirement age, may be able to take advantage of the voluntary suspension to restore some of the lost value of his Social Security retirement benefit and lock in a larger survivor benefit. In his case, he would be eligible for a 24% boost (three years x 8% per year in delayed retirement credits). The lesson for financial advisers: pay attention to rule changes that could affect your clients Social Security claiming decisions and I will do my best to keep all of you informed.