Is It Worth Paying Back Early Social Security Benefits At 66 For Higher Benefit Payments?

Published: 08th April 2015
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Can you make out better taking you Social Security benefits early and then paying it all back at your full retirement age to get a higher payout? Yes and no. Here's a way of evaluating it for you.

If you take your Social Security benefits (income) early, your monthly payments are permanently reduced as compared to what you'd get waiting until your full retirement age (FRA) at 66. That's an incentive to wait. Also, Social Security payouts are indexed for inflation, so as time goes on, your payments increase no matter what payment level you began them at.

-Social Security Benefits payouts

Social Security's 'quick calculator', shows that a man currently earning $50,000 per year and who was born on June 15, 1951, can begin his early Social Security benefits when he turns 62 and 1 month on July 15, 2013!

Here are the results of the Social Security's Quick Calculator for a person born on June 15, 1951 with current earnings: $50,000.00 just before he retires on July 15, 2013. His benefits - all in 2013 dollars - are:

*Retiring age: 62 and 1 month in 2013 with monthly benefit of $1,035,

*Retiring age: 66 in 2017 with monthly benefit of $1,449,

*Retiring age: 70 in 2021 with monthly benefit of $2,006.

So at 62 and 1 month (July 15, 2013) he'll get $1,035 per month.

You can also see that when he turns 66 (his FRA) in 2017 he'll get $1,449 per month. All these are in 2013 dollars without taking into account future inflation indexing of payouts. Forget about the future indexing since it doesn't affect the essential argument.

So, if he begins his benefits at 62 and 1 months at $1,035, by the time he reaches his FRA of 66 just 47 months later, he'll have received $48,645 (= 47 x $1,035).

Now, if upon turning 66 (i.e. his FRA) he decides to pay back his early Social Security benefits of $48,645, he can then start collecting his FRA monthly benefit of $1,449, as if he had waited.

-So what's the benefit?

Well, doing so increases his monthly benefit by $414 (= $1,449 less $1,035) for life for his payment of $48,645 back to Social Security. That's like buying an immediate annuity paying $414 per month for life for $48,645. And better still, those payments are indexed to inflation. So they'll just keep on increasing.

Now let's evaluate this benefit. First, he had to give up $48,645 of his current savings to get an addition $414 per month. If he would have been earning 5% on that $48,645, i.e. $203 per month, his $414 additional income would exceed that by $211. So his available income has increased more than holding on to that $48,645 to receive its earnings. So that's a benefit - if he doesn't intend to use that $48,645 for something else.

Lastly if he wanted to use that extra $211 to replace that $48,645 it would take about 19 years to make up for the principal of $48,645. But the remaining life expectancy at age 66 is another 17 years for a man and 19 years for a woman. So if you have longevity in your genes, and you want all that $48,645 back you'll have it when you're 85.

-So what's the bottom line?

First you should have the savings put away to pay back your early retirement benefits when you reach 66 - your FRA.

Next, you can take early retirement to enjoy your time off and live off the early retirement benefits -and other earnings from savings without depleting your payback amount.

At age 66, you can pay back all the early retirement benefits and begin receiving a higher Social Security benefit - even more than if you still used the interest earnings on your pay back amount. And that's for life along with all the inflation indexed increases too.

And if you still want you payback money back (and that's not critical) you'll have to live to about 85 while saving that increased payout difference over the interest that payback amount would have earned you.

...Well, think about it!


Shane Flait helps you with your financial legal, tax, and retirement goals.
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