You may reach a point where you need a lump sum of money, whether to fix up your car, deal with a home repair, or address another need. At that point, you have options. You could talk to lenders about tapping your home equity or turning to a loan that's unsecured. But you may want to consider borrowing the money from Social Security if you're old enough to take benefits.
How to take out an unofficial loan from Social Security
Social Security will not give you a loan or let you borrow against your future benefits. You can't, for example, ask to borrow $5,000 and then simply have Social Security deduct that sum from your benefits once you start collecting them.
What you can do, however, is file for Social Security early and then undo your claim after the fact. This strategy might allow you to effectively borrow money from Social Security, but it's not without risk.
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You're entitled to your full monthly Social Security benefit based on your earnings history once you reach full retirement age (FRA). That age is 67 if you were born in 1960 or later.
Meanwhile, you're allowed to sign up for Social Security once you turn 62. But for each month you claim Social Security ahead of FRA, your monthly benefit is permanently reduced.
There's an exception to that rule, however, and it's if you manage to undo your Social Security filing within a year of taking benefits. In that case, if you withdraw your application for Social Security and also repay all of the benefits you received within 12 months, you'll get a do-over and will be able to file for Social Security again at a later age. In doing so, you can avoid a permanent hit to your monthly benefit, all the while getting access to the money you need.
Here's how this tactic might work. Let's say you're 62 years old with an FRA of 67, you're still working, and you need a few thousand dollars but don't want to take out a loan.
In that case, you can file for benefits, take your money and use it to address whatever your need for cash entails, and then spend the next bunch of months banking your paychecks. You could then withdraw your benefits application within a year of your filing, repay the Social Security Administration what it paid you, sit back, and claim benefits at age 67, thereby avoiding a lifelong reduction.
A risky move, but an option nonetheless
The danger in claiming Social Security early and planning to undo your filing is that you might end in a situation where you can't repay the money you borrowed. That could lead to a permanent reduction in your monthly benefits -- something that might seriously upend your retirement.
But if you're confident you'll be able to repay the benefits you've received, then this strategy could work to address a near-term need for money. And that way, you can avoid racking up interest on a loan. At a time like this when borrowing rates are up across the board, that's not such a bad thing.
As an enthusiast well-versed in personal finance and retirement strategies, I can attest to the intricacies of leveraging unconventional methods to address financial needs. My understanding of the nuances involved in the realm of Social Security benefits allows me to shed light on the unconventional tactic outlined in the provided article.
The concept revolves around strategically filing for Social Security benefits, essentially utilizing the system to access a lump sum of money without resorting to traditional loans. The key here is to file for Social Security early, specifically at the age of 62, and then subsequently undoing the claim within a year of initiating the benefits.
To grasp the full scope of this tactic, it's crucial to comprehend the baseline rules of Social Security benefits. The article mentions the Full Retirement Age (FRA), which is 67 for individuals born in 1960 or later. At FRA, individuals are entitled to their full monthly Social Security benefit based on their earnings history.
However, one can opt to sign up for Social Security as early as age 62. The catch is that for each month you claim Social Security ahead of FRA, your monthly benefit is permanently reduced. This reduction, though, can be reversed if you manage to undo your Social Security filing within a year of initiating the benefits.
Here's a breakdown of the strategy:
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File for Benefits Early: In this scenario, let's consider someone who is 62 years old, still working, and in need of a few thousand dollars but prefers not to take out a traditional loan.
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Accessing the Funds: By filing for Social Security benefits early, this individual gains access to a lump sum of money to address immediate financial needs.
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Repaying Within a Year: To avoid the permanent reduction in monthly benefits, the individual plans to undo the Social Security filing within a year and repays the benefits received.
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Reclaiming Full Benefits at FRA: By successfully executing this strategy, the individual can later file for Social Security benefits again at the Full Retirement Age, thereby avoiding a lifelong reduction in monthly benefits.
While this tactic presents an option for obtaining needed funds without incurring interest on a loan, it comes with inherent risks. The article rightly points out the danger of being unable to repay the borrowed money, potentially resulting in a permanent reduction in monthly benefits—an outcome that could significantly impact one's retirement.
In conclusion, this unconventional approach to accessing funds through Social Security demonstrates a deep understanding of the system's rules and intricacies. However, individuals considering this strategy must carefully weigh the risks involved and ensure their ability to repay the benefits within the specified timeframe to avoid long-term consequences on their retirement finances.
