A Free Loan From Social Security

A little-known law allows Social Security recipients who are already collecting benefits to change their mind and start over. An individual can claim Social Security at age 62 and then reclaim again for an enhanced payout at age 70, provided he or she pays back every cent already received. No interest is charged on this “loan” from Social Security. So, an individual who doesn’t need to spend their Social Security income on immediate expenses could feasibly invest the money and keep the interest. Upon paying back the principal, these investors will get higher Social Security checks for the rest of their life.

Yet, there are some risks involved in this controversial claiming strategy. You could invest poorly and lose the money. And if you die too soon, this strategy will also involve a loss. A current 62-year-old born in 1944 would have to live until at least age 81 simply to break even, according to recent calculations by the Center for Retirement Research at Boston College. “Any individual with average life expectancy – age 83 – will benefit from implementing this strategy,” write researchers Alicia Munnell, Alex Golub-Sass, and Nadia Karamcheva. They estimate that roughly 60 percent of men and 70 percent of women who reach age 70 will live long enough to break even using this strategy.

But good health isn’t enough. You also need significant financial assets. In order to take advantage of this zero-interest loan you need to be able to afford retirement without the monthly benefit. Boston College calculated that approximately 30 percent of men and 32 percent of women have enough financial assets in 401(k), IRAs, and other liquid investments to make it to age 70 without using their checks.

This boon for wealthy investors also comes with a considerable cost to everyone else using the Social Security system. Boston College estimates that between $5.5 billion and $11 billion annually is paid out to high-income households using this strategy.

Check out these other unique Social Security claiming strategies.