Steps for getting a guaranteed lifetime income
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 markets 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. Should I do the buyback or invest the $158,529 in something else? - H.G., Dallas
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 vs. investing the same sum.
Using the Vanguard life annuity calculator on its Web site, for instance, I found that a joint and survivor life annuity of $788 a month with infl ation 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 Web site, 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 Web site, www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote.
scott@scottburns.com