Many retirees defer collecting Social Security benefits at the earliest date possible in exchange for collecting a larger amount beginning later in life. For each year that you delay collecting benefits, you will receive an 8% increase in your benefits. Based on the opportunity to receive greater benefits, I understand the incentive to delay collection. However, most people are not aware of a provision that allows a person to return the total amount of benefits collected and begin collecting a larger benefit amount.
Consider the following hypothetical illustration. Joe retires at age 62 and begins collecting annual Social Security benefits of $12,000 for the next five years. At the end of five years, Joe has collected a total of $60,000. The Social Security Administration will allow Joe to return the $60,000 and begin collecting the higher benefit amount as if he had never collected a dime.
The icing on the cake is that Joe can invest the $12,000 each year. Assume further that he earns a modest 5% rate of return, or approximately $600 for each $12,000 collected each year, for a total of $3,000 in earnings. Joe is permitted to keep the $3,000, return the $60,000 collected without interest to the Social Security Administration, and begin collecting the higher annual benefit amount for the rest of his life.
Therefore, consider collecting Social Security at the earliest date possible, park the money collected in a safe place earning a modest interest rate, return the principal collected when you reach full retirement age, pocket the interest earned during the collection phase, and ultimately collect the maximum Social Security Benefit for the rest of your life.