When Should You Pay Back Your Social Security Benefits
Deciding when to start Social Security benefits is an important decision. While full retirement age for Social Security benefits is gradually increasing from age 65 to age 67, you can still start benefits at age 62. However, your benefit will be permanently reduced by 20.8% to 30%, depending on your year of birth. Wait until age 70, and your benefit will increase by 3.5% to 8% annually, again depending on your year of birth.
Thus, the amount of your benefit can change dramatically, depending on when you start drawing benefits. However, you can undo your decision by filing form 521, "Request for Withdrawal of Application," with the Social Security Administration (SSA). You must pay back any benefits you received, but you do not have to pay interest or inflation adjustments on that amount. The form asks for your reason for withdrawing your application, so that the SSA can assess whether you understand the implications of your decision.
When does it make sense to consider withdrawing your application? Suppose you retire at age 62 and decide by age 64 that you really don't enjoy retired life. You can pay back your Social Security benefits for those two years, work for six more years, and then reapply at age 70, receiving a substantially higher benefit than you received at age 62.
Or suppose you retire at age 62 with reduced benefits. You didn't consider the fact that when you die, your spouse will receive 100% of your benefit provided he/she is over full retirement age. Now that you are 70, you wish you had waited for the higher benefit, so your spouse would have more income after your death. You can file the application, repay all benefits received, and then immediately reapply for Social Security benefits, receiving a much higher benefit amount.
But does it make financial sense to repay all benefits when you have received them for several years? In essence, you are purchasing an annuity with inflation protection by doing this. One way to evaluate your decision is to first determine how much your benefit will increase, including additional income your spouse may receive after your death. Then, find out how much an annuity from a private company would cost for that incremental income. If paying back your Social Security benefits costs less than purchasing an annuity, it's worth considering.