There has been a lot of talk about Social Security and its future. Unfortunately, a lot of the attention it has received lately has been negative. Social Security was designed to be a cross generational system of support based upon a number of then valid assumptions regarding demographics, life expectancy, and other factors. The original assumptions, through medical advancements and other changes in our health and in society, have lead to some flaws in the system. Although this is true, Social Security still remains a viable system of supplemental support for seniors now, and will continue to be in the future. It can and will be depended upon for generations of Americans to come. While most people see Social Security as a system of support payments that requires and mandates little planning, Social Security has its complexities and opportunities. In this advisory we look at the little used “Do-Over” option.
Within the rules regarding Social Security, a provision exists enabling those who have taken early distributions and who have the means, to increase their monthly Social Security payments once they reach the age of 66. Out of the millions receiving early distributions, utilization of the “Do-Over” option is relatively unused. Here’s how it works: Upon reaching 62 years of age, Person X opts to take early Social Security benefits. The benefits are 20-25% lower than had the participant waited until 66 to draw social security. In our example, Person X then draws Social Security for a term of years. He then decides he should have waited until the age of between 66 and 70 to draw Social Security and get the higher amount because, 1) he is in good health, 2) his family history suggests he could live to 80 or longer, and 3) he has the means to pay Social Security back and get handed a higher monthly distribution thereafter. The participant then pays his cumulative payments received back to the Social Security Administration in order to receive what would have been Social Security payments of 100 – 132% of full Social Security benefits.
Weighing Your Options
Paying back the cumulative payments received is expensive, typically over $100,000. As mentioned, those weighing whether to pay back Social Security should consider why and if they should. Health is a big factor. It will take time to overcome the payback. Usually it takes 13 years to break even on the Do-Over. If you are healthy and longevity is within your family health history, there is a good chance you will recover the investment and more. Second, your overall financial condition must be considered. Additional factors include life goals, immediate financial needs, family needs, and various others.
For those in business, business cycle, funding, and volatility can also be factors. Those in business do not necessarily always receive a week to week paycheck and the business may demand shareholder loans in order to continue. A financial analysis can be beneficial for those in business to determine whether the risk is acceptable or not.
To illustrate, consider a man who just turned 66 with excellent health and an excellent family history including his parents living well into their 90’s. This person will likely see 80 years of age. And, while the extra income may seem somewhat insignificant now, the step up in income will be even more useful during his 80’s when Social Security is statistically likely to be his only source of income.
On the other hand, there are those in their 60’s with significant health problems and a very meager family health history. Those individuals may be better advised to forgo the Do-Over option.
Giving the Social Security Administration a check to payback Social Security benefits can be daunting. Even though it may be seem like an expensive option, the Do-Over is relatively inexpensive when considering inflation adjusted increases and when compared to other investments. Everything else being equal, the Do-Over feature is a good option to consider, especially for those with the means to do it and health that will endure. If you are in the process of estate planning or a financial review, call The Center with your concerns.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors