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Intercst's analysis of SS at 62, 70, or both...
Old 09-01-2007, 09:02 AM   #1
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Intercst's analysis of SS at 62, 70, or both...

Where can a 70-year-old buy the least expensive life annuity?

I hope this option is still around in 14 years...

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Old 09-01-2007, 09:25 AM   #2
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The option may still be around, but only because few people will have the discipline to do this. You also run the risk that the SS Administration will decide to reject the application to withdraw.

Doing this is like having your cake and eating it too. If you die before reaching the age of 70, you (or at least your heirs) have all the benefits. And if you live, you collect higher benefits, only losing if dying before recollecting benefits to offset your buyback payment. But you've had higher monthly benefits before you do plus the after-tax interest on the SS benefits you set aside between 62 and 69. The payment rates for SS benefits are calculated on average life expectancies, with those who die early paying for those who live longer. This scheme cancels out that aspect of SS.
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Old 09-01-2007, 09:42 AM   #3
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I wonder if Greaney is planning on doing this with his own SS?

You would think if many people did this "application withdrawal" and payback the SS Administration would crack down on it once they figured out it was providing a free lunch to those of us financially able to do it.

OTOH, how many are able to pull it off and are aware it even exists? Probably not enough to bring the problem up on the SS radar screen...
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Old 09-01-2007, 09:46 AM   #4
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There was a thread awhile back on this scheme....I still dont think it would work out for many...
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Old 09-01-2007, 09:46 AM   #5
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This article makes it seem like a no-brainer to take SS at 62, stick the money in a Money market acct, and then "withdraw the application" at 70, pay back all money, then reapply. Wonder what the catch is?

edit- now I see the replies above...

I didn't even pick up on the mortality-gaming aspect. If you take SS at 62, then figure out you're unhealthy at age 69, just don't withdraw your application and reapply.
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Old 09-01-2007, 10:12 AM   #6
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Great plan -- thanks for posting that, CB.
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Old 09-01-2007, 10:17 AM   #7
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Quote:
Originally Posted by REWahoo View Post
I wonder if Greaney is planning on doing this with his own SS?
First, in his case it's a no-brainer. He has such a short working history and his SS will be a pittance of his SWR so he runs little risk in the early/payback attempt. The worst case is that he ends up starting SS at age 62 and getting slammed by the SSA at age 69. He could take solace in SG's & TH's excellent analysis of early SS's beneficial effects on his portfolio survival.

Second, considering the actuarial data for lifelong bachelors, he'd be doing an admirable job of hedging a small bet. It's probably less painful than getting married, too.

Finally, I think the growing publicity over this SS loophole will cause it to slam shut on more recipient's necks.
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Old 09-01-2007, 10:23 AM   #8
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Heh heh heh heh heh - The Norwegian widow has a note on her refrigerator door(under the Saints football schedule magnet) - keep 128k in the cookie jar(aka div stocks) - just in case.

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Less here than meets the eye
Old 09-01-2007, 11:41 AM   #9
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Less here than meets the eye

By retirement, most people should have pretty good expectations of how long they will live and what they will die of and this largely tells them when they should take it. Many won't be able to defer it even if they should as they will need the income, and this probably lowers costs overall. It can catch death from other causes, small though that might be. It points out there are two decisions here, when to take it and when to spend it which most people treat synonymously. Overall, the differences aren't that great on a percentage basis, though on an absolute basis, longevity is quite beneficial.
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The other question
Old 09-01-2007, 12:01 PM   #10
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The other question

is how people's personal discount rate correlates to their life expectancy. If highly correlated, those that delay it are those that will live long enough to benefit from it, while if largely non-correlated, those that take it early may prize spending it early, even if they would benefit from delaying if they had an average discount rate. I think a few are in the first camp, but most probably fall in the second, which is still good. If they prefer to spend it early, they are better off doing so since they have decided this is what makes them happiest. Again, the latter would be lowering the cost for the rest of us.
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Old 09-01-2007, 04:28 PM   #11
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Yes IMO this will work -- the "only" requirement for approval I could get out of a SS representative last year was repayment of ALL benefits received which INCLUDE any Medicare Premiums if over age 64 (i.e., on MEDICARE). The form is simple and I think you could accompany it, at AGE 70, minus a couple of months, to coincide with a new application for age 70 benefits. As the article mentions most people do it between 62 and 65 which seems simpler. Personally, I plan to revisit it when I am about 69.75 years of age to see if it still is a possibility. The way I read the charts provided by the SS it appears that the benefit being received at age 69 would increase by 131.5% given my birth year. They will probably dump the possibility; but only time will tell.
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Old 09-01-2007, 08:44 PM   #12
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As I see it, the most cumbersome part would be proving the amount of recoverable taxes paid. The example given simply assumes that 85% of the received SS was taxed at 25%. In actuality it's not that simple, since the taxable portion of SS affects the AGI and therefore other schedule A deductions (e.g. medical). Additionally, parts of the SS benefit could fall into different brackets, even affecting how other income is taxed. Of course, the easiest way to compute this would be to set the SS to zero in old tax programs (assuming you still had the software and data files) and see how much the tax liability drops. But, can you just enter this number as a credit and hope you are not audited, or would years of amended returns need to be filed?
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Old 09-02-2007, 05:01 AM   #13
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The provision looks like something setup to allow people who made bad decisions (couldn't afford to retire) to adjust and not be penalized for life. The problem is that most people in that situation will not have the money to payback. They might be able to do this if the decision was made really early. It may not be practical for most people to do this once they are 7 years into retirement.

It is more likely to be exploited by people with means to do so.

If people actually figure out how to game this provision, it will be shutdown.



Quote:
1515.3 Can an application be withdrawn after a claimant dies?
After the claimant's death, an application may be withdrawn, regardless of whether we have made a decision on it if:
The application was for retirement benefits that would be reduced because of the claimant's age;
The claimant died before we certified his or her benefit entitlement to the Treasury Department for payment;
A written request for withdrawal is filed by or for the person eligible for widow(er)'s benefits based on the claimant's earnings; and
The conditions in (A) and (B) of the above section are met.

Does this mean that one spouse can undo the deal after the other spouses death and increase benefits? It looks like it.

I get the basic idea of Intercst's article. My brain is not fired up yet... It is early in the morning and I am grappling with all of the considerations and the potential implications. It seems to get a little more complicated when a spouse is in the picture.

Two scenarios assuming the payback money is available:
  1. Spouse 1 dies early. Spouse 2 keeps the money drawn. Or Spouse 2 resets if there appears to be an advantage. How does spouse 2 determine if there is an advantage to reset? One part of the decision is their health which might help predict longevity. This is still a difficult thing to predict.
  2. Both Spouses die early. The heirs benefit if the money was not spent.
So how does a couple actually benefit from this situation. Only if they believe they are getting ready to die.



I am going to have to have a few more cups of coffee and think this one out.
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Old 09-02-2007, 08:33 AM   #14
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Fire'd@51: I do not think any amended returns need be filed as line 67 of 1040 appears to be there just for this purpose.

I actually did some Excel and paper and pencil on this and came up with this; projected it to my age 70: SS received $172K (the Gross Payback Amount); amount taxed $113K (notice it is not exactly 85%); tax refund amount (@ 15% of the payback amount; which I project to be correct) $17K. There actually will be a tax credit carry forward to the next year and part of the following year. So what would be the gain on this plan? Tax Refund $17K (previously mentioned); Interest on previous benefits at 5.7% (my personal rate on benefits in CD's) $46K. So this makes the net out of pocket expense to do this $109K ($172-17-46=$109K). How long to recover the net payback amount ($109K divided by the $7K annual increase in benefits = about 15.5 years). So if at age 70 you think you will make it beyond age 85 year it would pay, if not don't. I know this is a "quick calculation" and may need some tweaking but it gave me some idea of what it would would entail it also makes me think it would really be not worth the effort. The $172K payback if kept in CD's (and not repaid) should spin off about the same rate as now which would be about $9.8K which tends to make the effort mute.
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Old 09-02-2007, 12:17 PM   #15
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Originally Posted by R Wood View Post
Fire'd@51: I do not think any amended returns need be filed as line 67 of 1040 appears to be there just for this purpose.
I'm not sure about this. I always thought Line 67 was for the case where having more than one employer in a given year resulted in excess SS withholding. Intercst's example says this is reported on Line 70c which is Form 8885, but Form 8885 appears to deal with a tax credit for health insurance. :confused:

Quote:
Originally Posted by R Wood View Post
I actually did some Excel and paper and pencil on this and came up with this; projected it to my age 70: SS received $172K (the Gross Payback Amount); amount taxed $113K (notice it is not exactly 85%); tax refund amount (@ 15% of the payback amount; which I project to be correct) $17K. There actually will be a tax credit carry forward to the next year and part of the following year. So what would be the gain on this plan? Tax Refund $17K (previously mentioned); Interest on previous benefits at 5.7% (my personal rate on benefits in CD's) $46K. So this makes the net out of pocket expense to do this $109K ($172-17-46=$109K). How long to recover the net payback amount ($109K divided by the $7K annual increase in benefits = about 15.5 years). So if at age 70 you think you will make it beyond age 85 year it would pay, if not don't. I know this is a "quick calculation" and may need some tweaking but it gave me some idea of what it would would entail it also makes me think it would really be not worth the effort. The $172K payback if kept in CD's (and not repaid) should spin off about the same rate as now which would be about $9.8K which tends to make the effort mute.
Is your calculation for someone who started SS at the normal retirement age, as opposed to age 62? In Intercst's example, the payment increase is 66% for someone who started collecting benefits in 2000 (i.e. turned 62 in late 1999), so the payback (disregarding the time value of money) was 8.6 years. The increase would be 76% for someone who started collecting SS at 62 today.

In Intercst's example, even without recovering the taxes paid on prior SS benefits, the WR would still be 9.1% vs 7.4% with Vanguard.

I guess it ultimately boils down to whether you want a bigger annuity at age 70, and delaying SS seems to currently be a cheaper way of acquiring this extra annuity. Intercst's example seems to indicate that taking SS at 62 is optimal since it is revocable if it turns out that you made the "wrong" decision.
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Old 09-02-2007, 12:39 PM   #16
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FIRE: I took it at age 62 and all my calculations were based on that (age now 67, next month). Actually took the percentage from the SS site that was linked in the Intercst site; maybe I should reread the initial article. The actual tax calculation is mentioned in Chapter 11, Page 79, of IRS Publication 17 which can be downloaded from the SS.gov site. There are two ways to calculate the tax but the one that seems to be most applicable would result in using line 70 of IRS Form 1040 (the other method would use an itemized deduction on Schedule A). You are right about line 67; my mistake.

Still seems to be, at least, IMO and in my case, to be not worth the effort at age 70 if one takes the initial benefit at age 62; maybe that is why the SS allows it. Seems to be, like you said, best if one finds at age 63 or 64 that they should have waited in order to have a larger benefit. Of course I wonder how many of those people would have the funds to make the payback.
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Old 09-02-2007, 01:10 PM   #17
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Originally Posted by R Wood View Post
FIRE I took it at age 62 and all my calculations were based on that (age now 67, next month). Actually took the percentage from the SS site that was linked in the Intercst site. Will have to study IRS publication about that line on the IRS 1040 but I think that was what it was for (repaid benefits). Interesting exercise anyway.
I'm still confused by your calculation. According to the Handy Table linked to from Intercst's example, it looks to me like your payment increase would be

131.5/77.5 = 1.697 or a 70% increase

If your total received SS over 8 years is 172K, that would be an average of 21.5K per year, so the increase would be 21.5 x 0.7 = 15K, probably more since the last year would be greater than the average due to COLA's.

What am I missing?
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Old 09-02-2007, 01:39 PM   #18
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Yes IMO this will work -- the "only" requirement for approval I could get out of a SS representative last year was repayment of ALL benefits received which INCLUDE any Medicare Premiums if over age 64 (i.e., on MEDICARE). ...
Are you sure you just have to repay premium? I saw something that appears to imply that benefits paid from Medicare need to be repaid.


Quote:
Did you know that when you retire and apply for Social Security, you will be forced to enroll in Medicare Part A (the socialized hospital program) or forgo your cash benefits? That's Social Security Administration policy. In other words, if you prefer to keep/pay for your private health insurance and reject Medicare Part A, you will pay a huge financial penalty.1
Additionally, once enrolled, the only way to get out of Medicare Part A is to pay back all the Social Security benefits you ever received, plus any money paid on hospitalization coverage.
IHF: What Every American Needs to Know about Social Security and the Mandatory Medicare-Enrollment Policy


https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0200206095



Can you withdraw from SS and not withdraw from Medicare?
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Old 09-02-2007, 02:06 PM   #19
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Originally Posted by FIRE'd@51 View Post
I'm still confused by your calculation. According to the Handy Table linked to from Intercst's example, it looks to me like your payment increase would be

131.5/77.5 = 1.697 or a 70% increase

If your total received SS over 8 years is 172K, that would be an average of 21.5K per year, so the increase would be 21.5 x 0.7 = 15K, probably more since the last year would be greater than the average due to COLA's.

What am I missing?
Nothing I failed to raise the initial benefit from the reduced 62 Yr figure to the FULL PIA level (77.92% up to the 100% PIA #). Have to go back again and look at it since now the increased benefit and shortened payback period changes the picture.

SS would be reimbursed for the Medicare Premiums for the Part B costs (Part A Medicare, while mandatory, the acutal cost is premium FREE). The Part B premiums are normally deducted from your benefits at age 65 (unless you opt out of Part B premiums) and you never actually see the money for the premiums. Although you do not see the money they are part of the total benefits (and subject to taxation, where applicable). Since you would be repaying ALL benefits you would, in effect, be reimbursing for Medicare Part B.
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Old 09-03-2007, 01:59 PM   #20
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CB - Thanks for posting this. The idea of repaying benefits and starting over has been mentioned in a number of threads. This is the first time I've seen links to SSA forms and procedures to make it more "concrete".

R Wood - Thanks for the digging out the tax rules.

I feel like I understand this possibility a lot better with this information.

I think the "bottom line" is that this option gives people who were planning to take SS at 62 a little more confidence in their decision. They have at least the possibility of a redo if they decide at a later date that they should have waited.

On the other hand, for people who were pretty sure they were going to wait until 66 or 70 for benefits, this does add a little complication. Maybe they should take benefits at 62, save the money, repay later, and pocket the interest. Although that seems like a "no brainer", the complexity of calculating the tax refund, and the possibility that the gov't will change the rules, makes it a little less clear.

(Looking at Publication 17, it appears that you could simply use Method 1 - treat the repayments as a deductible expense in this year - and ignore the recalculations required for Method 2. This may not maximize your tax refund, but it is a lot simpler. It seems especially appropriate if you spent the SS benefits so that you didn't have to withdraw from your IRA, and now you make a big IRA withdrawal for the repayment. It seems that the deduction and the IRA withdrawal exactly cancel each other out.)
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