The Winning Strategy for Social Security

Knowing when to start taking Social Security is one of the hardest questions facing new retirees. But a little-known provision makes taking monthly payments early a no-lose scenario.

Recently, John Greaney, who has contributed several articles to The Motley Fool's Rule Your Retirement newsletter, explained on his Retire Early Home Page website how retirees can have the best of both worlds with their Social Security benefits. This simple strategy gives retirees the benefits of getting some income at age 62 while retaining the potential for taking higher payments later on.

Using the system
On the surface, electing to receive early payments from Social Security seems like a potentially costly gamble. You can start taking benefits as early as age 62, but your monthly check will be 20%-30% smaller than if you wait until your normal retirement age.

On the other hand, if you wait until after your regular retirement age and start taking benefits at age 70, you don't just avoid that reduction. You also get extra delayed retirement credits that tack on an additional 25%-33%. The net result is that your monthly payment will be as much as 75% higher if you wait until age 70 than if you start receiving benefits at age 62.

Have your cake and eat it, too
So, how can you solve this retirement dilemma? The answer lies in a provision in Social Security law that allows you to change your mind about taking early Social Security. By filing a request to withdraw your application with the Social Security Administration, you can basically turn back the clock and undo your original election to take benefits. Then, when you apply for benefits at a later date, you'll get a higher monthly payment.

The surprising thing about this provision is how lenient the SSA is in letting you rewrite history. If you've already received benefits when you withdraw your application, you'll have to repay what you received. But you won't owe interest or penalties, and you can keep any earnings you've made from investing that money. There's even a way for you to get compensated for part or all of any taxes you may have paid on your Social Security benefits.

Using a simple example that assumes you invest your early retirement benefits to earn 5%, Greaney concludes that someone born in 1938 could have earned more than $17,000 extra by using this strategy over simply waiting until turning 70 to take benefits.

It takes discipline
The one drawback of this strategy is that to earn the extra money, you have to invest your Social Security checks. That means having enough alternative income sources to live on.

But if you do have other income, you might do even better than the example above. The eight years between age 62 and 70 are long enough to consider investing in conservative, low-volatility stocks like these:


Average Annual Return from 2000 to 2007

Abbott Labs (NYSE: ABT  )


Boeing (NYSE: BA  )


Caterpillar (NYSE: CAT  )


Diageo (NYSE: DEO  )


Johnson & Johnson (NYSE: JNJ  )


3M (NYSE: MMM  )


Procter & Gamble (NYSE: PG  )


A portfolio equally weighted in these stocks would have returned a total of 11.8%, more than doubling your net take after repaying Social Security. And that doesn't even account for lower taxes on dividends and capital gains on stocks.

Regardless of how you invest, however, the application withdrawal strategy is definitely worth a closer look for those nearing retirement age. It may just prove to be the best way to hedge your bets against the uncertainties of being retired.

See these articles to learn more about:

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2009, at 4:33 PM, jasonssandos wrote:

    For those who are interested here is a website that provides strategies & free calculators to figure out when to collect and also determine how much of your social security benefits are taxable.

    <a href="" target="new">Social Security Max</a>

  • Report this Comment On June 27, 2014, at 11:39 AM, AntoinetteLPembe wrote:


    Hope you can help on this question....63 year old sister who is a widow applied for social security survivor benefit on her husbands social security so that she could let her SS grow until age 70; was told this would not affect her independent 23 year old disabled son's SS (who is in an income based group home). She just received her first SS check only to discover that her son's SS benefit was greatly reduced, and she was told this was because of a family maximum benefit. She is now trying to figure out what to do, as the amount her son received is insufficient to meet his "rent" to stay in the home. Are there any strategies you can suggest for her? (She would prefer that he get the larger of the benefit, even if her portion is reduced, if this is possible) Thanks for any help you can suggest!

  • Report this Comment On August 26, 2014, at 11:32 PM, 2thfool wrote:

    The 75% figure you quoted is, I believe, before taxes.

    On the other hand, if you have retirement income (from savings or regular IRA's) and if both spouses are drawing SS, you will probably exceed the low income threshold for non-taxable benefits. This means you may pay your ordinary income rates for the extra amount you will gain by delaying past full retirement age. Run your own numbers, of course, and you may find this is not a large amount (and it won't be a factor if you are below the taxable income threshold), but it should be factored in to any decision on whether to delay collecting benefits.

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