Q. I am 73 and have investigated buying back the Social Security benefits I took at age 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. This is a difference of $788 a month. My spouse is approaching 59 years of age.
We currently invest in property with good results (6 percent to 8 percent return, excluding appreciation), and our investments are in CDs, money market and Vanguard funds (about $300,000). We have the ability to buy back the benefits.
Our property consists of two homes and one condo with no mortgage (about $650,000), and another condo valued at $165,000 with a $100,000 mortgage. I am in excellent health, and we own a small business that returns 35 percent gross on sales of $1 million annually.
A. It is best to go through the reapplication process before age 70 when the increase in benefits stops. Since the increase in benefits 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 in benefits. Even so, it is likely to be a good trade compared to investing the same sum.
Using the Vanguard life annuity calculator on its website, for instance, I found that a joint and survivor life annuity of $788 a month with inflation adjustments for a 73-year-old male married to a 59-year-old woman would cost $198,386. That is a good deal more than the $158,529 that you will have to pay back.
The life annuity guarantees that as long as one of you is alive, that income will be paid out. This works to overstate the value of the annuity somewhat because your wife’s future spousal benefits will be replaced by a benefit equal to your benefit if she becomes your widow. Even so, this is probably a good choice to make if you are concerned about your wife’s ability to manage her finances and investments after your death.
Another factor to consider is that the cost of what you return, that $158,529, will be offset somewhat by a credit for all the income taxes you have 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, so I suggest you test the entire transaction out with a good tax accountant.
Readers who are unfamiliar with the idea of reapplying for Social Security benefits can learn about this rare but interesting option by reading my earlier column on the subject on my website, www.assetbuilder.com. Readers who would like to test the value of deferring Social Security benefits can price inflation-adjusted life annuities on the Vanguard website (http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote ).
Q. Can you tell me how to calculate the cost of an annuity with the following conditions?
Recipient is a 61-year-old male. He would receive $2,000 per month starting at age 75 (14 years from now). He is in average health. How much would it cost to buy an annuity to pay the $2,000 per month considering his life expectancy at age 75? ---R.S., by email
A. You won’t be able to calculate an exact figure because interest rates will change over the period. But you can get a pretty good “guestimate” by taking the following steps.
First, get the cost of a life annuity in the amount of $2,000 a month from the www.immediateannuity.com website. 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 annuity will cost less. If interest rates fall, the annuity will cost more.
Second, discount that value by the interest rate you might earn on a CD-like tax-deferred annuity. For a large annuity deposit, you’re likely to be able 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 today for the $220,000 life-only annuity in 14 years and $126,000 for the 10 years of guaranteed payments annuity.