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Posted on April 11, 2020

When should you start taking Social Security benefits?

It’s a perennial question. When you reach age 62, you can apply for Social Security benefits, but they’ll be significantly reduced for life. Or, you can wait until you’re old enough for full benefits (a sliding scale between ages 65 and 67, depending on when you were born). Which is best?

The question isn’t easy to answer, since it depends, among other things, on the age of your future demise. If you die at age 64, you’ll get nothing if you wait. But if you last to age 100, you’ll suffer 35 years of reduced benefits for the sake of a few years of payments early on. Where’s the break-even point?

You can spend hours poring over Excel spreadsheets if you want. But according to The Center For Retirement Research at Boston College, there’s a way you can have your cake and eat it too—but only if you have the ability to practice unusual financial discipline.

The “unusual strategy” described by the Center is based on a little-known provision of Social Security law. The provision states that if you take early benefits, you can switch over to full benefits later. The catch? To do so, you must pay back the benefits you already received in full.

What’s so great about that? When you pay the benefits back you are not required to pay interest on the money. Yet there’s nothing to stop you from investing the money you receive and earning interest on it. When you pay it back, you get to keep your earnings.

And that’s the basis of the strategy. Apply for benefits at the earliest possible point, but invest every penny you receive in safe, interest-bearing investments like bank CDs or government bonds.

Then you sit back and wait. When you hit the age for full benefits, you’ll have a nice little nest egg set aside. Now, you’ll have two choices. If you’re in poor health, and don’t expect to be around to draw benefits for much longer, just let things ride. You’re still getting payments, and you’ve got your nest egg.

Otherwise, pay back the benefits you received, start drawing full benefits, and keep the interest you earned, courtesy of Uncle Sam. You win either way—but only if you’re disciplined enough not to dip into the money before you hit the age of full benefits.

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