Life doesn't allow many do overs

[kcjenkins]

Life doesn't allow many do overs, especially when it comes to financial planning. Most of us simply save and invest as best we can and hope that in retirement we run out of time before we run out of money. Until recently, financial planners tended to treat Social Security benefits as the arthritic component of a retirement plan: a predictable, if feeble, income stream with limited range of motion.

But between ages 62 and 70, you can bust three surprising Social Security dance moves -- the reset, the file and suspend, and the restricted application -- which can significantly expand your planning options and supersize your benefits.

1. The Reset

The reset, or do over, feature gives some flexibility to taxpayers who may have lived to regret taking a reduced benefit at age 62 instead of their full benefit at age 65 or 66, or the bonus amount by delaying retirement until age 70.

It allows you to reset your benefit amount by essentially coming out of retirement by filing Social Security Form 521, or a "Request for Withdrawal of Application," repaying all Social Security benefits received to date with no interest or adjustment for inflation, then reapplying at your current age. You can do it only once, and it is irreversible.

Once the Social Security Administration approves your request, which is almost automatic, you collect at the stepped-up amount for as long as you can fog a mirror. One added plus: Your spouse thereafter may collect spousal or survivor benefits based on your stepped-up benefit rather than your meager early-retirement amount.

2. The File and Suspend

File and suspend allows married taxpayers who retire at different ages to collect optimal benefits. Here's how it works:

Let's say Jack has reached his full retirement age of 66 but plans to work until 70 to collect his delayed retirement credits, which can increase his full benefit amount by 32 percent. Let's also say Jill, his nonworking spouse, just turned 62. He can file for Social Security benefits but request an immediate suspension of his benefits, which allows Jill to then apply for her Social Security at his benefit level, without locking him into a lower payment for life. He won't receive any checks and will continue to accrue delayed retirement credits for himself.

His wife can then apply for benefits on his record and begin receiving checks at a higher amount than she would have received on her own employment record. With a little planning and saving, Jack later may decide to reset at age 70, which would increase not only his own lifetime benefit but Jill's spousal and survivor benefit.

3. The Restricted Application

Let's juggle our Jack-and-Jill equation a bit. Jack is still 66 and wants to work until he's 70. Now let's say Jill is also 66 and looking to retire, but her career has earned her a full benefit on her own record. So she won't be drawing on Jack's record. In this case, Jack would not file for Social Security but would instead do what is called "restricting an application" to Jill's benefits only.

What does that do? It allows Jack to file as spouse on Jill's record and earn half of her full benefit while still racking up delayed retirement credits of his own. That means if Jill earns $1,000 a month, Jack will receive $500 a month on her record while he continues working, increasing their family benefit amount 50 percent. When Jack retires at 70, his delayed credits will bring a higher benefit amount, which would mean a higher survivor benefit for Jill should she outlive Jack.

Social Security Administration spokesman Mark Lassiter admits there's nothing terribly new about these program features. The reset has been around as an escape clause since the dawn of the program for people who wanted or needed to return to work, while file and suspend was enacted in 2000 as part of the Senior Citizens' Freedom to Work Act.

[TAXBILLY]

Good info. Thanx KC.

taxbilly

[RitaB]

Speaking of SS, I AM SO TIRED of clients thinking that I'm making an error when they have taxable benefits. Among other things, people don't understand that repaying benefits and paying taxes on benefits are two different issues. My FATHER-IN-LAW kept arguing with me yesterday (when he picked up his free return): "But I'm too old to be paying on SS. Bob said his preparer doesn't do anything with his SS."

This is the SECOND year I have turned over his SSA and completed the worksheet explaining as I go. I also told him Bob may be married and/or may not earn as much as you do, etc.

Next year, when he says his SS shouldn't be taxable, I'm gonna say, "You're right. Let's just leave that off."

Nah, I won't do that. But, I DID tell him maybe he should be talking to Bob's preparer, haha. I shouldn't have done that, I know, but it really felt good.

[JohnH]

I always tell them I don't agree with it being taxable, but given that the rules are what they are, they should be grateful they have enough income that their SocSec IS taxable. There are plenty of people who don't have that "problem" and they'd gladly trade places if given the chance.

[RitaB]

I always tell them I don't agree with it being taxable, but given that the rules are what they are, they should be grateful they have enough income that their SocSec IS taxable. There are plenty of people who don't have that "problem" and they'd gladly trade places if given the chance.

Amen, John! I started to tell my father-in-law to retire already cause other people would like to have his job and pay his taxes! Then, I thought about Thanksgiving and Christmas dinners and decided to just smile and nod.

[clay]

RE: One big possible downside to the Reset: if you die the month after you reset, you have lost everything you collected before the reset - question is, do you feel lucky?

[JohnH]

If I did the reset and found myself on my deathbed a few days later, I wouldn't have any second thoughts about my careful planning. My heirs may be wishing I handn't done it, but not me. Assuming I was in good health (as far as I knew) at the time of the reset, I'd say re-thinking the wisdom of having done it would be the farthest thing from my mind. The risk isn't one of making a bad bet - the only real risk is that of outliving your assets/income. This option to begin drawing benefits early, putting the money aside, and then taking the do-over if you're in good health, seems like a smart financial planning strategy if the other aspects fall into place.