Restarting the Social Security clock

Sample Social Security card

TEXT OF STORY

Tess Vigeland: How soon should you start taking your Social Security benefits? Start early, your check will be a lot smaller. Hold off and you can boost the payout by around 8 percent for every year you wait until you're 70.

But there are risks. As Marketplace's Bob Moon reports, when it comes to Social Security, it is your prerogative to change your mind.


Bob Moon: If you're kicking yourself now for starting your benefits too early, here's what you may not know: You can magically restart the clock at a higher rate.

Laurence Kotlikoff: It's like finding money on the street. This is really what we're talking about.

Boston University economics professor Laurence Kotlikoff writes about this is a new book called "Spend 'til the End." He says you can return what you've already received and the government will call things even.

Kotlikoff: A Social Security redo is what it is. It's quite amazing. They don't charge interest and you can deduct the repayment from your income taxes.

Sound too good to be true? It may be for those who just aren't able to give it all back.

Pat Kropp is a Social Security beneficiary in Chapel Hill, North Carolina. When we approached her with this idea, she initially counted herself out.

Pat Kropp: I mean, I would have to come up with $45-50,000 just for myself and that's excluding if my husband wanted to do that and I don't know that I want to dip into my retirement money to do that.

Fair enough. Our experts say it's a good idea to consult with a financial planner or use special software that's available to crunch the numbers and make sure you'll really benefit. But Professor Kotlikoff says retirees shouldn't be afraid to draw from their investment nest egg to lock in what amounts to a sure-thing insurance policy. It's cheaper than buying an annuity and less risky than keeping the money in a 401(k).

Kotlikoff: It's going to be safer, for sure. You know, the stock market is a wild ride. If they have most of their money coming in the form of an annuity and a small amount that they invest in the stock market, well, economists would view that as kind of a safe allocation. But if they have most of their resources in the stock market, that's a pretty risky option.

Think about this even if you don't have the means to repay the Social Security money you've already spent. T. Rowe Price financial planner Christine Fahlund says in the long run, it might be worth finding a way.

Christine Fahlund: If the younger generation is concerned about maybe someday having to support their parents financially, they might be willing to help out with this trade, as it were, because in the end, the family could end up winning financially.

Social Security beneficiary Pat Kropp decided the idea is worth running past her financial planner -- and her brother, who happens to be approaching his eligibility age.

Kropp: Somebody that's really clever could do this when they're 62 and put the money away and not use it and earn income on that and then say, "Okay, I'm going to send it back."

Professor Kotlikoff agrees -- it could be worth taking Social Security early just to use it as an interest-free loan. But one word of caution:

Kotlikoff: The risk here is that the government may change the rules. It may get to a point where so many people do this that the government says, "Hey, we're losing money on this and we're going to shut this down."

For now, Kotlikoff says the main benefit is for those already drawing Social Security who can substantially boost their real income and guarantee a higher lifelong payout to whichever spouse lives the longest.

Kotlikoff: Even for people age 63 to age 75, in that range, there's a significant gain to living standard to be had here.

Benefit recipient Pat Kropp is intrigued by all this, but she's still wondering what many of us might be: Is it really worth paying back such a big lump sum?

Kropp: I don't know, I may not live that long. So there's always that question.

Christine Fahlund at T. Rowe Price understands that kind of skepticism.

Fahlund: You know, it's like so many financial decisions, in fact, I would say most financial decisions. There are trade-offs to be made. We leave money on the table every day when we buy homeowners' insurance and our house doesn't burn down, but we think that's a good thing.

Clip from "Young at Heart": And if you should survive / To a hundred and five / Think of all you'll derive / Out of being alive / And here is the best part / You have a head start...

I'm Bob Moon for Marketplace Money.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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