Suspending Social Security Payments: Part 2

Background
Last month we introduced the topic of suspending Social Security payments. We noted there were two approaches to stopping your monthly payments and starting them later. The first is called Claim and Suspend. The second we labeled Withdraw and Reapply.

Each strategy is entirely voluntary. Both are designed to maximize your benefits and assume that you (and/or your spouse) will live a long time. Under Claim and Suspend, you don’t owe the Social Security Administration anything upon suspension. Under Withdraw and Reapply, you must pay back every dollar of benefits you have already received before your reapplication will be approved.

This month’s Wealth Management Newsletter will discuss the Withdraw and Reapply strategy. Please refer to our previous issue for information on the Claim and Suspend option.

Details
Under Withdraw and Reapply you stop your Social Security payments and pay back the amount of benefits you have already received. The strategy involves trading off a portion of your investment portfolio for a predictable stream of income that can be significantly higher than what you have been receiving from Social Security. In essence, you are giving up some flexibility on the use of your assets in exchange for certainty of monthly payments. (We are assuming the Social Security system remains essentially the same with regard to those payments).

When appropriately applied, the strategy can be helpful as a survivor benefit. After the death of the first spouse, the remaining spouse takes the inflation-adjusted, recalculated, higher benefit without the fear of the payment ceasing before death.

The good news: you do not have to pay interest on any of the Social Security payments you return. If you have been investing your payments - or spending the payments while not withdrawing from your portfolio - you get to keep the earnings. In addition, you receive a cola on top of any delayed credits on your payments.

The bad news: Longevity is a big issue in order for this strategy to work. Depending on the assumptions, the strategy is not profitable unless you (and your spouse) live at least seven to ten years following the reapplication.* In addition, you must be willing to give up the ability to pass onto heirs the principal investment used to pay back Social Security or to use that same investment for long term care or other large expenses. These are significant tradeoffs that should be evaluated carefully.

Example:
Charles, age 70, has been taking Social Security for 8 years, since retiring at age 62. His wife Cindy is also retired with Social Security benefits. Charles, whose monthly payment is larger than Cindy’s, opts to withdraw and restart his benefits. Their retirement portfolio totals $1,000,000 – half of which is in IRAs and the other half in a brokerage account. In addition, Charles has a pension with no cost of living rider and $150,000 in bank CDs.

The amount Charles owes Social Security is $215,000, which he will take from non-qualified assets. This still leaves Charles and Cindy with $935,000 that they can use to support their lifestyle or meet their legacy goals. In return, Charles’ monthly benefit increases by approximately 57% (varies by age). Charles and Cindy will use the increased Social Security payment to offset the decline in buying power on the pension and as an attractive survivor benefit.

How It Works in Practice
1.   Complete a Withdrawal of Application – Form SSA-521 and enclose a payment for the gross amount of previous Social Security Benefits received plus past Medicare premiums (check with SSA for the exact amount). You do not have to pay interest on the benefits.
2.   The Social Security Administration will report on your annual Social Security Benefits Statement in Box 4 the amount they received from you for the year you filed Form 521.
3.   For tax purposes the repayment offsets any amount received during the year for Social Security. Any additional money paid back is then listed as an itemized deduction (not subject to 2% floor). Alternatively, you can file amended returns for previous years.
4.   The SSA refigures your monthly payment as if you never have received benefits and starts the new monthly payment for you.

Caution
•   This strategy works best if you have already started Social Security. If you still have a choice as to whether to take early benefits or delay the start of payments, you may be better off delaying.
•   This strategy is not beneficial if qualified assets are used to repay Social Security or if the amount used for repayment is more than approximately 25% of your retirement portfolio. These guidelines vary by individual circumstances.

As with many financial planning opportunities, your decision on whether to implement the Withdrawal and Suspend strategy should be reviewed carefully with your professional advisors before you move forward.

*Mike Kitces, The Kitces Report, wwwkitces.com calculates the internal rate of return on the refigured Social Security benefits, based on years until death. If you live fifteen years the expected annual return is 7.5%; twenty years the return increases to 9.9% and if you live 25 years, your annual return would be 11%.

StrategicPoint Working with You
If you have any questions about Social Security, please give us a call so we can walk you through your options.

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