When does SS repayment make sense?

[smjsl]

I have a (single) relative around 69 y.o. who is receiving SS and not in great health. He can repay SS he had received since he was around 66. How would one decide whether this makes sense?

First, is there a formula to know how much he would start receiving? My understanding is it's

current monthly amount * (100 + 8 * (age-66)) / 100

assuming 8% does not compound. (or does it?) Is this precise formula or is there something more precise?
(Note: age 66 is approximate because there was a phase out period but I can adjust for that.)

Say above formula is correct... then, consider what $100 per year he had paid would give him - he would have to return $300 for the 3 years (from 66 to 69) that he had received the payments. He would then start getting 124/year, i.e. extra $24/year (inflation adjusted). This means that he would have to live at least for ~300/24 = 12.4 years to make the switch worthwhile. Does this logic make sense?

 

[rayvt]

It almost never makes sense financially. It absolutely doesn't make sense for someone in poor health. Your calcs seem close. Here's something I put together.

My SS early-or-late spreadsheet
https://spreadsheets.google.com/ccc?key=0AlyWRtMroxvgdDI2MlY0UDR4WFRQRFE0Tkw0d19pTnc&hl=en

 

[MasterBlaster]

It almost never makes sense financially.

Well here we go (again).

It makes sense if you have assets to draw from and you expect to live some good while still. It make sense if leaving money after you are gone is not an issue.

For those of you using historical market rates of your stash to compare scenarios, you need to make the rate risk normalized and after tax normalized.

 

[Bestwifeever]

I have a (single) relative around 69 y.o. who is receiving SS and not in great health. He can repay SS he had received since he was around 66. How would one decide whether this makes sense?

(snip)

This means that he would have to live at least for ~300/24 = 12.4 years to make the switch worthwhile. Does this logic make sense?

Do your calculations take into account any earnings the payback amount could have earned during the payback period?

Does your relative want to do this? Do you think his his poor health is a factor in his life expectancy?

 

[ziggy29]

Actually, it probably makes more sense now than it usually does. In some sense one can think of a payback as similar to buying an annuity, and unlike a traditional annuity, the extra monthly payouts don't become a lot smaller when interest rates are very low. In fact the lower interest rates get the more cost-effective this "annuity" becomes. Still not advisable for someone who is 69 and in questionable health, IMO.

 

[smjsl]

Thank you for responses so far!

It makes sense if you have assets to draw from and you expect to live some good while still. It make sense if leaving money after you are gone is not an issue.

MasterBlaster, the person has some money to draw from but does not want to spend money on something that does not have financial benefit. So, instead of "handwavy" answers, I am trying to understand what the risk-reward is here. If my calculations make sense, then the person knows that they would get back their money after 12.4 years, and then they can decide whether this makes sense to them.

So, 2 questions: 1 - are my assumptions correct? 2 - are my calculations correct?

Do your calculations take into account any earnings the payback amount could have earned during the payback period?

Good point - they only implicitly assume that persons returns keep up with inflation to the same degree as SS cola adjustments.

Does your relative want to do this? Do you think his his poor health is a factor in his life expectancy?

He does not know whether this makes sense to do... thus, the question. I suspect health may affect life expectancy but I honestly don't know - this is something he would have to decide. I am just trying to come up with some good estimate on how long he has to live for this transaction to make sense financially.

@rayvt: interesting spreadsheet, I will go over it in more details later. I noticed that it takes as input how much the person will receive - I don't know this. Is my 8%*3 years = 24% increase a correct assumption?

@ziggy29 - yes, it's like an annuity. I am trying to figure out the break-even point for it.

 

[rayvt]

smjsl,
The ratios are set by SSA. FRA (66 for most of us) is the base of 100%. Age 62 start is 75% , age 70 start is 132%. The actual dollar values are merely interesting.

As far as break-even period all that matters is the ratios, not the exact numbers.

 

[FIRE'd@51]

smjsl,

I agree with your numbers. However, there are a number things that your relative should consider. How will this extra income affect his tax situation, especially if he has sizable RMD's to deal with? Also, will this extra income trigger the increased Medicare Part B premium which is triggered by AGI, not taxable income. Conversely, he can take a tax deduction for the amount he repays (or a tax credit for the taxes he paid on the benefits he already received). He needs to figure this out on an after-tax basis.

This is once he has made the decision to annuitize in the first place, given his health. For most people the SS annuity is cheaper than purchasing a COLA'd annuity from an insurance company. However, an insurance will lower the cost of his annuity if his health is poor, so he likely would get a higher withdrawal rate than a healthy person from an insurance company. SS will probably still be better (and safer), but he should inquire what the insurance company rate would be in order to do an "apples-to-apples" comaprison.

 

[donheff]

If it makes sense at all then NOW!! SSA has proposed to eliminate the buyback. If their proposal is implemented you will get a single 12 month window to change your mind. After that fuggetaboutit.