Why you shouldn't wait until age 70 to collect
Social Security -- maximizing your SS benefit
using a Withdrawal of Application (SSA-521)

This article was first posted on January 1, 2008.

The Social Security Answer Book

Every other week there seems to be another piece in the financial press extolling the virtues of waiting until age 70 to begin taking your Social Security benefits. This recent article from Forbes magazine is but the most recent example of this genre.

All of these articles seem to ignore the fact that you don't need to delay taking Social Security until age 70 to get the maximum benefit. While the Forbes article focuses on the joint mortality anomaly that gives a slight advantage to delaying SS to age 70 if you have long-lived genes, they only mention the Withdrawal of Application strategy in passing in the next to last paragraph of the article. You can begin collecting Social Security at age 62, save and invest your monthly check, and then file a Withdrawal of Application (SSA-521) at age 70 and get the same maximum benefit you would have collected had you waited until age 70. The only catch is that you must repay all the Social Security benefits you've collected from age 62 to 70 when you file the Withdrawal of Application, but you won't be charged any back interest on the amount repaid and you get to keep any investment gains. The IRS even allows you to take either a tax credit or tax deduction to recapture any Federal income taxes you've paid on your Social Security benefit. The Withdrawal of Application process was discussed in the September/October 2007 update to the Retire Early site.

Of course, the biggest problem with waiting until age 70 to begin taking Social Security benefits is that you might die before then. The 2003 IRS mortality table estimates that more than 7% of 62-year-olds will be dead by age 70. A 62-year-old retiree with the maximum Social Security benefit who started drawing Social Security in 2000 would have collected over $103,000 in benefits (net of income taxes) by the end of 2007. If those eight years of monthly checks were invested conservatively at a 5% pre-tax return, he'd have more than $17,000 in after-tax investment gains for a total account value of more than $120,000.

Is it worth it to delay Social Security until age 70 for the higher spousal survivor benefit?

Probably not. If the primary wage earner died at age 70, the surviving spouse would get a monthly Social Security benefit equal to the deceased's benefit, $1,515 per month at age 70. If the deceased had not been collecting benefits since age 62, the surviving spouse would get a benefit of $2,514 at age 70 -- $998/month more.

The surviving spouse could do a Withdrawal of Application to capture that additional $998/month benefit. This would require the repayment of all the Social Security benefits earned to date for both spouses, $103,685 for the deceased and $44,947 for the survivor (both net of the tax credit) for a total of $148,632. Buying a Vanguard life annuity with the same monthly benefit would cost $187,938 for a female and $167,161 for a male. There's a significant savings in doing the Withdrawal of Application plus you get to keep any investment gains you earned by investing the eight year's worth of Social Security benefits. This Excel spreadsheet details the analysis, click here.

The Social Security Withdrawal of Application option allows beneficiaries to have their cake and eat it, too. If you are wealthy enough to delay taking Social Security until age 70, you're wealthy enough to take it at 62, and save and invest the monthly benefit.

Vanguard Retirement Annuities -- Lifetime Income Program
http://www.aigretirementgold.com/vlip/VLIPController?page=Overview

www.esplanner.com Reapply for Social Security -- Raise Your Living Standard
http://www.esplanner.com/Case%20Studies/double_dip/double_dip.htm