retirement

3 financial do-overs with Social Security

Social Security Administration spokesman Mark Lassiter admits there's nothing terribly new about these program features. The reset has been around as an escape clause since the dawn of the program for people who wanted or needed to return to work, while file-and-suspend was enacted in 2000 as part of the Senior Citizens' Freedom to Work Act.

What is new is their use as planning tools in retirement strategies.

"We've probably only heard of that in the past year or so," Lassiter says. "The thinking used to be, take (Social Security) early, get it while you can and if you don't need it, sock it away and let it draw interest. But now, people are looking at it as a lifetime annuity with cost-of-living adjustments built in. It's a much more complicated decision now."

Should you plan to reset?

There is consensus that the spousal features of file-and-suspend and restricted application are sound, prudent and worthy of including in any retirement plan.

But opinions vary as to the wisdom of planning to take a reduced benefit at 62 and then repay and reset the benefit amount at a more advantageous age.

Laurence Kotlikoff, a professor of economics at Boston University and the co-author of "Spend ‘til The End," says such a strategy makes perfect sense if, as he espouses, you plan for the worst-case scenario of living to 100 rather than to some actuarial target in the upper 70s. What's more, if inflation takes off, as now seems likely, it would make the repay and reset strategy even sweeter because you would be repaying in ever-less-valuable dollars.

"My guess is, there are probably eight to 10 million people ages 65-71 that could benefit from this," he says.

"If you started collecting at 62 and you're now 70, you can probably raise your benefit immediately by about 65 percent. That's a big increase if you're going to live to 100," Kotlikoff says.

But James Mahaney, vice president of Prudential Retirement, begs to differ. He points out a number of problems with resetting as strategy at the time of early retirement. The taxpayer may not have the money to repay when the time comes due to medical or other emergencies. He or she may die before resetting, thereby leaving the spouse with a meager survival benefit.

Or, the person may die shortly after repaying, in essence forfeiting eight years of benefits. A marriage or divorce could also affect the outcome, Mahaney says.

"I don't like it at all, mainly because it's going to encourage people to take their Social Security benefits at 62," he says.

Then there's the health issue: how can you predict at 62 what you'll feel like at 70?

"Age 77 or so tends to be the break-even age (to recoup your repayment)," he says. "If I have poor health at 70, I'm probably not going to do it (reset)."

Lassiter says Social Security does not have a dog in this hunt. "We don't, in any way, try to influence people to take it early or late. We consider that a very personal decision," he says.

Nor has he seen a stampede to reset. Last year, a whopping 167 taxpayers who were at full retirement age or older withdrew from retirement for various reasons, not just to immediately reset.

He says that while including features such as reset in retirement strategies come with some risk, it's a problem many retirees would love to have.

"For most people, Social Security is 40 percent of their income; once they retire, they need that Social Security check to continue to pay their bills," he says. "They're not necessarily in a position to do this."

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