Cashing in by re-retiring

The Social Security Administration recently announced that retirees would get no cost-of-living adjustments this year -- and maybe not even next year -- because the inflation measure it uses to determine them has declined for the first time in more than three decades.

Congress and the administration are working on legislation to provide seniors a $250 consolation prize, a one-time check that would amount to about 2% of the average senior’s benefits. But retirees may be able to do far better than that by taking advantage of a loophole in the Social Security law. Using this loophole, which allows you to “restart” your retirement benefits years after you’ve retired, can be risky. But if you’re healthy, have some savings and are under age 70, it may well pay off in spades.

Someone who originally retired at age 62 and “re-retires” at 70, for example, would boost monthly benefit payments by 76%, said Brett Horowitz, a certified financial planner with Evensky & Katz in Coral Gables, Fla.

The catch? You have to repay what Social Security has given you so far.

Sound crazy? It would be if you’re in poor health. That’s because Social Security payments die with you. Unless you live past age 82, you are likely to have repaid more than you got back in monthly income, said Larry Kotlikoff, an economics professor at Boston University.

Moreover, if you don’t have more than enough in savings to repay the benefits in a lump sum plus some money left over to cover emergencies, you shouldn’t do it, Horowitz said. That’s because you can’t go back. Re-retiring is like buying a lifetime annuity with your savings. Once purchased, you can’t get your principal back. You bought yourself a stream of monthly payments. You don’t have the option of deciding that you’d like to have the money in the bank instead.

That said, the typical retiree’s biggest risk is outliving their savings. This allows you to ensure against declining living standards when you’re old.

“The biggest risk old people have is living to 100,” said Kotlikoff, who is also coauthor of the 2008 book on retirement planning called “Spend to the End.” “You can’t count on dying on time.”

To see how it works, let’s take a look at Peter and Kate, a hypothetical 70-year-old retired couple who originally started taking Social Security benefits at age 62. Kotlikoff estimates that each spouse would be receiving $13,250 per year or some $1,104 per month today.

However, if they had retired at age 70, they each would be receiving $1,724 per month, or $20,692 annually.

To restart their retirement, they would have to fill out a one-page form (No. 521), which is a “request for withdrawal” of retirement benefits, said Kathleen Wiegand, a Social Security spokeswoman in San Francisco.

The agency would then respond with a letter saying how much they’d have to repay in previously received benefits. Once they repaid those benefits, they could “re-retire” and start getting payments at the higher rate.

Importantly, Kotlikoff said, Social Security does not charge interest on the money you must repay. It simply wants the amount it paid you back.

Kotlikoff estimates that his hypothetical couple would each need to write the government a check for $94,556.

However, that payment gets them an extra $620 per month, or about $7,440 per year. If they live at least another 13 years, until they’re 83, they’re ahead of the game. That would pay back their $94,556 outlay and then some.

If they live into their 90s, they’re way ahead, he added. If Peter and Kate both live to age 90, paying back their Social Security benefits generated an extra $100,000 in income.

“People don’t have to gamble on Wall Street,” he said. “This is like buying an annuity at a great rate from the most creditworthy organization around.”

Better yet, you get a current-year tax credit for all the income taxes you paid on your Social Security benefits in years past, he said.

The one caveat: Kotlikoff is not sure how long this loophole will last.

That’s because both the Social Security;col1 and Medicare;col1 systems are financially troubled. If millions of retirees took advantage of this do-over opportunity, the systems could go into the red even earlier than they are projected to now. For that reason, some experts are lobbying to close this loophole before too many retirees squeeze through it.

Until they do, however, it may be a chance to boost your income when cost-of-living increases are scarce.

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