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SS repayment trick
Old 01-10-2010, 11:40 PM   #1
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SS repayment trick

I have not followed this topic much but wanted to double check if my back-of-envelope calculation is right. Example: say a person receives $X of SS for 4 years from age 67 to age 70 at which point they repay it all back (4*X), "reapply" and now receive 7-8% more for each of the 4 years (based on latest yahoo article), i.e. current X + approximately extra 0.3*X per year (~7.5% compounded for 4 years => ~30%).

Assuming SS is COLA-d to their inflation rate, and thus everything is in constant dollars, to recover back the given up $4*X, it will take 4/0.3 ~ 13 years. In other words, only after age 83 will this move be beneficial. If the person dies before 83, they should not have done it.

In addition...
(1) if personal inflation is different from COLA, corresponding adjustments have to be made - e.g. if personal inflation (such as medical expenses) go up faster that SS COLA, add more years to 13.

(2) if earnings on the given up $4*X amount is greater than COLA/inflation, it would take more years to recover back the full $4*X amount and potential earnings on this $4*X over and above the inflation/COLA rate.

(3) the person is taking some risk in assuming that SS benefits will be paid during these years as promised (perhaps a small risk for next 13 years.. ?? ).

I guess I am wondering why people say it makes sense to do this sort of trick - it does not seem all that definite to me that it's advantageous necessarily. Probably I am missing something...
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Old 01-11-2010, 12:40 AM   #2
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Quote:
Originally Posted by smjsl View Post
I have not followed this topic much but wanted to double check if my back-of-envelope calculation is right. Example: say a person receives $X of SS for 4 years from age 67 to age 70 at which point they repay it all back (4*X), "reapply" and now receive 7-8% more for each of the 4 years (based on latest yahoo article), i.e. current X + approximately extra 0.3*X per year (~7.5% compounded for 4 years => ~30%).

Assuming SS is COLA-d to their inflation rate, and thus everything is in constant dollars, to recover back the given up $4*X, it will take 4/0.3 ~ 13 years. In other words, only after age 83 will this move be beneficial. If the person dies before 83, they should not have done it.

In addition...
(1) if personal inflation is different from COLA, corresponding adjustments have to be made - e.g. if personal inflation (such as medical expenses) go up faster that SS COLA, add more years to 13.

(2) if earnings on the given up $4*X amount is greater than COLA/inflation, it would take more years to recover back the full $4*X amount and potential earnings on this $4*X over and above the inflation/COLA rate.

(3) the person is taking some risk in assuming that SS benefits will be paid during these years as promised (perhaps a small risk for next 13 years.. ?? ).

I guess I am wondering why people say it makes sense to do this sort of trick - it does not seem all that definite to me that it's advantageous necessarily. Probably I am missing something...
There are many opinions on this. One thing though, the 7.5 or 8% per year that the payout increases (depending on your full retirement age) is not compounded. Say your full retirement is age 66. Each year you do not take benefits, up until age 70, your benefit increases 8% over the base benefit at age 66, not over the prior years benefit.

I think one reason this may interest some of us is that we have never, ever gotten anything useful from the government, and it is intersting to imagine that we are perhaps finally getting some kind of a good deal.

Ha
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Old 01-11-2010, 06:13 AM   #3
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Also, don't forget some of the age 67-70 options if you are married. In our case (my DW/me are the same age), she will be claiming her SS somewhere between May (she turns 62) and age 66. At her FRA age of 66, I'll claim SS spousal benefits against her FRA benefit (even though she may take it at age 62).

That means that I will be getting some SS benefit (around $1k/mo) from my age 66 through age 69.

At age 70, I'll claim my SS, which will be 175% of my age 62 benefit, and 250% of her age 62 benefit. Assuming I pass first (per the stats), she will have a much higher SS benefit.

This is not a collect/payback scheme, but it is "working the system" based upon the rules. It isn't what you are asking about, but I just offer it as another option for a lot of folks.

You have to come up with a plan to fit your needs; there is no automatic answer.
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Old 01-11-2010, 06:41 AM   #4
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Originally Posted by smjsl View Post
I guess I am wondering why people say it makes sense to do this sort of trick - it does not seem all that definite to me that it's advantageous necessarily. Probably I am missing something...
Don't forget about taxes, taxes you paid because because of the extra
SS income that you don't get back, and taxes you'll be paying on the
new higher SS.

TJ
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Old 01-11-2010, 06:46 AM   #5
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First of all, you wouldn't have to payback 4X. The amount would be 4X less taxes paid and less COLA increases from the previous years. NOT many are taking advantage of this, probably because that amount is still quite large for many that scrape by and don't have large savings/investments or who are unwilling to take the risk you mention of the longevity necessary to recoop their repayment. Those that are taking this are likely comparing the lump sum payment to immediate annuities providing cola payments for life with possibly some extra spousal benefits upon your death. Comparing it to cola'd annuities the cost is relatively low. Now payback calculations can get tricky, particuarly if you want to factor in unknowns like potential investment returns on the money paid back, not to mention real value of the inflated payments you receive over the next decade or so. Factor in a couple more risks that the SS benefits will eventually be means-tested, capped at a level below your new max, OR at least fully taxed and the picture gets even more cloudy. SO, if you're 70 have the extra money lying around, feel relatively sure you'll live another decade and/or your spouse will live another couple decades and you would rather take your risks on the SS annuity than in other investments this could be for you. IF you guess wrong, it's likely only your estate will suffer the consequences.

Hmmm, might be interesting to see if you could take out a fixed HEL(~4-5%) for the payback amount and compare those payments to the increase in SS amount. Whether the HEL gets paid back by life insurance protection, the SS increase, OR eventually by your estate, your higher SS benefit would be locked in. In addition, the HEL payments don't inflate, but your SS should. In a sense, you may be betting your house on SS continuing though.
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