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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 percent 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 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 percent, 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 insure against declining living standards when you’re old."The biggest risk old people have is living to 100," said Kotlikoff, who is also co-author 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.
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