Three years ago Retire Early outlined a Social Security strategy that effectively allowed you to buy an inflation-adjusted life annuity from the Social Security Administration at a big discount to what a commercial insurer would charge for the same benefit. (See, Where can a 70-year-old buy the least expensive life annuity?, September 2007.) Social Security records show that over a thousand well-to-do retirees who have the $100,000 to $200,000 in ready cash required to pay back their Social Security benefits have taken advantage of this option in the past three years.
In a recent article on the Kiplingers web site, Mary Beth Franklin reported that the Social Security Administration was contemplating a change in the rules. On December 8 the Social Security Administration issued those new rules, effective immediately, click here.
The new rule limits the filing of a Withdrawal of Application to the 12 month period immediately following your first Social Security check. This would end the Social Security Withdrawal of Application strategy that allows you to claim your Social Security benefit at age 62, save and invest the money, and then payback those benefits eight years later (interest-free, and without adjusting for inflation) at age 70 to get a sizeable increase in your monthly benefit. There is a 60 day public comment period before rule is finalized, but it's probably a done deal.
The Withdrawal of Application strategy was attractive in that it effectively allowed you to buy an "actuarily-fair", inflation-adjusted life annuity from the Government without the fees and costs of a private insurer which can consume as much as 30% of the purchase price. Because of the adverse selection in the private individual annuity market, they really only make sense if you believe your longevity is in the top 10%-20% of the population.
You can still "buy" the additional inflation-adjusted monthly benefit that the now defunct Withdrawal of Application strategy provided at age 70 by simply delaying your first Social Security check until then. Think of it as "buying an annuity on the installment plan." It would still be much cheaper than taking Social Security at age 62, and then buying an annuity in the private market at age 70 to make up the difference in your monthly benefit.
The March issue of Retire Early will compare the cost of buying an annuity versus delaying Social Security benfits until age 70. It will also illustrate how long you'll need to live to make each alternative a reasonable deal for you.
Links for additional information
Financial Advisor Magazine - Little known rule lets you restart
Social Security 02/29/2008
www.analyzenow.com -- Ask Bud Hebeler when to take Social
Security Benefits? 01/04/2004
Andrew Tobias column of 04/11/2006
Vanguard Group - Social Security: Does it pay to delay?
Morningstar Conversation #55481 -- The "risk" of waiting to
take Social Security 12/18/2006
Morningstar Conversation #45213 -- OT When to take Social
Morningstar Conversation #32377 -- When to take Social Security
Charles Schwab -- When should you take Social Security?
CS Monitor -- When does it pay to take Social Security benefits
CNN Money -- When taking Social Security benefits early is a
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