By FPA member Scott M. Kahan, CFP®
Last Updated: December 13, 2010
New rules, which took effect last week, for Social Security withdrawals now make a solid retirement plan even more pertinent. Without much fanfare, a little known Social Security rule allowing someone to collect at a lower rate, payback what they collected and then increase their payments at age 70 has ended.
The rule allowed for some flexibility in your decision as to when you would start taking Social Security benefits and was especially beneficial to retirees who decided to go back to work and wanted to stop taking benefits. In light of the recession over the past few years, a number of people also used this rule to help them bridge between forced early retirement and possibly finding a new job. It worked like this:
- You could start collecting Social Security at age 62. At this age, you would have collected a lower amount than you would have collected if you waited until full retirement age (FRA).
- At any age up to 70, you could then choose to pay back the full amount you received over the previous years.
- When you were ready to begin collecting again, you would then receive the amount you would be eligible for at that age — not the lower amount you may have started at age 62.
- For example: Start collecting at age 62 and receive $750 a month. At age 64, you decide you want to stop payments, so you payback all that you received for the previous two years. Then at age 66, you decide to start collecting again, so your new benefit would be $1,000 a month. (Figures according to www.ssa.gov.)
Although, many people did use the rule as it was originally intended, others basically saw it as an interest free loan from the government which they would fiscally benefit from. For instance, some individuals would take early benefits, invest the money, keep the interest earned on the money and then give back the initial amount.
On a large scale, the Social Security Administration feared this would only further the strain on the Social Security system. In response, they felt they needed to take action. According to the SSA.gov website, “this change is being made because recent media articles have promoted the use of the current policy as a means for retired beneficiaries to acquire an ‘interest free loan.’” The “free loans” essentially cost the Social Security Trust Fund interest that would have been earned as a whole for the fund as well as in administrative costs to process the withdrawal applications.
Under the new rule, Social Security recipients can now withdraw their application for benefits only once within 12 months of receiving their first check, and this can only be done once in their lifetime. The changes to the rule will now require recipients to be even more diligent with their retirement planning and sure they know where they want to start drawing income first once they enter retirement.
Even though the rules are effective immediately, there is a 60 day public comment period. This period will allow the Social Security Administration to consider any relevant comments which could affect the final published rules.
Read the full statement released by the Social Security Administration.
FPA member Scott M. Kahan, CFP®, is President & Wealth Manager of Financial Asset Management Corp.