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Borrow $100,000 interest-free from Social Security

If you decide to collect benefits early, you can change your mind later. It might pay.

By Jeff Schnepper Mar 1, 2010 12:11PM

How would you like a $100,000 interest-free loan from Social Security?


Even better -- you can elect whether to pay it back.


Here’s the deal. And the best part is that there’s really no downside.


You qualify for Social Security benefits at age 62. But, if you take the money before normal retirement age (66 for those born between 1943 and 1954 up to 67 for those born 1960 and after) your benefits are reduced. For baby boomers born up to 1954, the cutback is 25%. If you were born in or after 1960, the cut is 30%.

So, if full benefits at normal retirement age would be $1,000 a month, boomers at 63 collect only $750. Their kids’ benefits would be sliced down to $700.


On the other side of the coin, if you wait until age 70, your benefits are increased 8% for each year you defer. A boomer’s check would jump 32% (8% for four years) to, in our original example, $1,320 per month.

Here’s where it gets interesting.


If you pay back what you’ve received, your future benefits are based on your current age.


Depending on the actual amount paid, you could have received more than $100,000. In our example, if you collected the reduced benefit at age 62 and got the $750 per month for the 96 months before you hit age 70, you got $72,000.


Pay back the $72,000, without interest, and now your benefits grow to $1,320 a month, an increase of $570 per month ($1,320 less $750) or $6,840 per year.


Try buying a lifetime annuity of $6,840 for $72,000. You’re not going to find one.


Leaving out the time value of money, if you live another 11 years, to age 81, you’re ahead of the game. IRS tables assign a 17-year life expectancy for 70-year-old IRA beneficiaries.


If you’re in poor health, and have a reduced life expectancy, don’t pay back the money.


In the worst case, put the money received in an interest-bearing account until age 70. Use the principal to pay back Social Security and the interest earned to put a smile on your face.


What if you paid taxes on the Social Security benefits? Press the reset button on that one as well and request a refund. Don’t you just love do-overs?


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