Ask Money

The narrowing of the Social Security do-over

Chris Farrell Jan 12, 2011

Question: I will be 66 next month and plan to continue working until I am 70. I have been thinking of drawing social security and investing it in my 401K plan until I retire. Then I plan to pay it back so I can draw the higher amount. Using a crude compound interest calculator, I calculate I could make about $12,000 over four years. I used an interest rate of 3.87 because that’s what my 401K investment is projected to yield in the next five years. I realize it could do better or worse. Does this sound like a good plan? Debby, Alexandria, VA

Answer: If I understand your plan correctly, I wouldn’t I wouldn’t be a fan of your proposal. If your plan is to take the make a Social Security do-over the rules of the game have been changed so that it won’t work anyway. The Social Security Administration is dramatically shrinking the benefits do-over option.

(By the way, just so there is no confusion among readers, you can only fund a 401(k), an IRA or comparable retirement savings plan with earned compensation. That generally means you can’t use Social Security benefits, pensions, capital gains, and the like to fund a retirement plan. However, since you would be working it really wouldn’t be an issue. The money for the 401(k) would be coming out of your paycheck.)

Here’s what you used to be able to do with Social Security: If you retire early and take a reduced monthly benefit, you could change your mind, reapply, and get the bigger payments that go to those who wait to collect benefits. The catch was that after filling out Form 521 you had to send the government a check covering the benefits you’ve been paid. But since you didn’t have to account for interest or adjust for inflation it was a good financial deal–too good in fact.

The Social Security Administration has proposed that retirees can withdraw their application for Social Security benefits only once during their lifetime. And the withdrawal must be made within 12 months of when a retiree starts getting benefits. In other words, you have a 12 months window to change your mind. That’s it.

In thinking about your question I wondered why not simply delay applying for Social Security if you plan on working? The longer you wait–until you get the maximum benefit at age 70–the heftier the Social Security monthly check.

Even waiting a year past your full retirement age (age 66 for people born in 1943 through 1954) will boost the return on your Social Security dollar. Each year you delay taking benefits the monthly Social Security payment increases by about 7% to 8% (not including cost-of-living adjustments). That means if you were to receive $1,333 a month at age 66 you would get $1,760 if you didn’t apply until age 70. As we all know, that is a really terrific guaranteed return on investment. Plus, you’ll be saving in your 401(k).

You might want to check out the Social Security and retirement calculators at

That’s my reaction. Does anyone else have a suggestion? Thanks.

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