There’s a little known provision to Social Security that’s starting to get some attention (see here, here, and here, for examples). It’s commonly known that you can file for benefits beginning at age 62, but the longer you wait, up to age 70, the higher monthly benefit amount you’ll receive. So the little known provision is that you can apply for benefits at age 62, collect benefits for as long as you like, then re-apply later using Form 521 and get the higher rate. Of course, you do have to repay the benefits you’ve already received (it’s not a total free lunch!), but you don’t have to repay any interest on the benefits you’ve already received and you get to claim a credit for all taxes you previously paid on the Social Security benefits you’ve already received.
I won’t spend a lot of time re-hashing what’s already been said in the articles referenced above. Basically, if you’re 70, in good health, and have enough liquidity that you can pay back the SS benefits you’ve received to date, then essentially Social Security offers by far the best annuity deal going. Essentially, when you repay your SS benefits and start over at the higher rate, you’re buying the equivalent of an inflation-adjusted lifetime annuity with a pay-out equal to the increase in your monthly SS payment.
I did a little comparison shopping on what buying an equivalent lifetime annuity at age 70 would cost, and then (since no similar tool appears to exist anywhere else) I created a spreadsheet that takes your birthday and information about payments you’re currently receiving, and spits out what you’d have to repay and how much this would increase your monthly SS benefit (now available as an online calculator here). The results are pretty amazing.
Comparing the SS repayment option to the closest comparable annuities available commercially shows the SS repayment option will typically yield about a 25-50% monthly premium. As an example, here’s the spreadsheet calculating the repayment amount for a person born in the fall of 1940, who took SS at the earliest possible date, and is now repaying SS in order to collect at the maximum monthly rate upon reaching age 70:
In this example, the person is currently collecting ~$1400 monthly, but after starting over at the new payment level will receive almost $2400 monthly. This will require about $117,000 in prior payments to be paid back. Essentially, for under $120k, this person is receiving a $1000 monthly lifetime annuity that will adjust for inflation.
For comparison, I went to Newretirement.com which offers annuity quotes of the best available rates being offered currently for commercial annuities. I got a quote for a lifetime annuity for a 70-year old based on a lump-sum initial investment of $120k. Here’s the result:
While they don’t offer an inflation-adjusted annuity choice, the 3% option closely approximates historical inflation of recent decades (2-3%). Here you see the same investment of $120k in a commercial annuity would yield a monthly payout of $681…not even close to the payout offered through Social Security!
By the way, the date and other figures in yellow in the spreadsheet were picked entirely at random to generate an example of somebody turning 70 soon. It was not picked to maximize the results…the result is fairly typical! Please visit the online calculator and compare the results with commercial annuity quotes yourself. You only have to enter the information in the yellow, highlighted boxes. Everything else will be calculated for you. There are basic instructions in the spreadsheet itself, although I’ll be posting again soon with more detailed instructions. Actually, I’ll probably have this tool available in a web-based format in the next couple weeks.
Find out if it’s worth it for you, and then contact me for details about the tax impact and how you claim credit for all the taxes you paid on SS benefits that you’ll be repaying.