Social Security 201
Most people think that when it comes to Social Security, you just “take what you get.” The reality is a little bit more complicated. Did you know that the longer you wait to start collecting Social Security, the higher your monthly payment will be? Take, for example, a successful business owner who decides to start receiving Social Security benefits at age 62. According to a recent MarketWatch report, his payout Is $18,794 per year. If he waited until age 66, that payout would be $25,732. At age 70, the benefits jump to $35,250, almost double the amount he was offered at age 62.
In general, your benefit increases at around 8% annually until age 70, after which it doesn’t increase except for cost- of-living adjustments. Often people don’t like the idea of starting later because they want the “bird in hand.” But a healthy person in their mid-60s is likely to live well into their 80s. Because of these longer life expectancies, some people are starting to take advantage of a little known option offered by the Social Security Administration. It’s called the “payback strategy,” and it’s particularly attractive to small business owners. Here’s how it works. The recipient elects to begin taking Social Security Benefits at age 62 or 65. But when he or she reaches age 70, they pay back what they’ve received and start collecting the higher amount. “It’s like a “do-over button,” says Laurence Kotilkoff, a Boston University Economist. “Paying back your benefits and starting over can mean a potentially huge increase in your standard of living.”
For our business owner mentioned above, it would cost him about $150,000 to pay back his benefits. But he would have the option of claiming any taxes on benefits paid during those eight years as a deduction in the “payback” year or filing for a tax credit. But who has $150,000 laying around? Quite a few people actually. Especially small business owners who sell their business. It’s a fairly straightforward mathematical exercise to calculate the amount of money you’d need to set aside in a CD, treasury bonds, fixed annuity or other reliable asset to provide you with the “magic number.” This is especially true if you start trying to “prefund the refund” ahead of time.
Social Security beneficiaries “should definitely look into it because the increases you get by delaying are so substantial and they’re guaranteed,“ says Christine Fahlund, senior financial planner with T. Rowe Price in Baltimore, Maryland. Obviously you’d want to consult your accountant and financial advisor about this approach. But if you have questions about this option, consult IRS Publication 915 at www.irs.gov for more information online.
If you have questions about how to integrate your social security income into funding your overall retirement, schedule an appointment with us online or call us at 740.992.3381.