Buying back Social Security benefits can prove profitable, if you have the means
Q. I am 73 and have looked into buying back the Social Security benefits I took at 62. The buyback number is $158,529. My current monthly benefit is $1,231. A total buyback would give me a new monthly benefit of $2,019.
We have the ability to buy back the benefits. I am in excellent health, and we own a business that returns 35 percent gross on sales of $1 million annually. Should I do the buyback or invest the $158,529?
H.G., Dallas
A. It is best to go through the reapplication process before 70 when benefits increases end. Since the increase stops but the requirement to return paid-out benefits remains, the relative value of the deal is diluted by the years of benefits returned with no offsetting increase. Even so, it is likely to be a good trade vs. investing.
Using the Vanguard life annuity calculator on its website, I found that a joint and survivor life annuity of $788 a month with inflation adjustments for a male, 73, married to a woman, 59, would cost $198,386 - more than the $158,529 you will pay back.
The life annuity guarantees that as long as one of you is alive, that income will be paid. This overstates the value of the annuity somewhat because your wife's spousal benefits will be replaced by a benefit equal to your benefit if you die. Even so, this is probably a good choice if you are concerned about your wife's ability to manage after your death.
Another factor is that the cost of what you return, the $158,529, will be offset somewhat by a credit for the income taxes you paid on the portion of your Social Security benefits that have been subject to taxation since you were 62. The more Social Security benefits you paid taxes on, the lower the net cost of reapplication.
This is NOT something to do without good accounting advice. You must discuss the entire transaction with a tax accountant.
Q. Can you tell me how to calculate the cost of an annuity with the following conditions? He is male, 61, and in average health. He would receive $2,000 per month starting at 75. How much would it cost to buy an annuity at 75 to pay the $2,000 per month considering his life expectancy?
R.S., by e-mail
A. You won't be able to get an exact figure because interest rates change. But, get the cost of a life annuity in the amount of $2,000 a month on immediateannuity.com. The cost for a life-only annuity for a male, for instance, was $220,000. The cost of the same annuity with 10 years of payments guaranteed was $250,000. If interest rates rise in the next 14 years, the cost will be less and vice versa.
Then, discount that value by the interest rate on a CD-like tax-deferred annuity. For a large annuity deposit, you're likely to get a guaranteed rate of about 5 percent for 10 years. Discounted at 5 percent, you'd need to put aside about $111,000 now for the $220,000 life-only annuity in 14 years and $126,000 for the 10 years of guaranteed payments annuity.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com.
