Pay Back Your Social Security
It Could Be the Best Annuity You Could Buy

The above title was the original title of yesterday's post, which later became "Social Security Decisions: Important But Not Irrevocable - You Have Much More Flexibility Than You May Think." I actually posted it with the "Annuity" title above, but after sleeping on it overnight, I realized that yesterday's article was really about flexibility, an important issue in its own right.

I have written before about flexibility. The general rule is, "Given two equally attractive decisions, always choose the one that is more "reversible," (i.e. allows you to change your mind later)

Flexibilty is a key element in any personal financial decision, and retirement decisions are no exception. In fact, I think flexibility becomes MORE important as you get older, as youre "wiggle room" for creating alternatives diminishes the older you get. And I wrote on this before, in my original article, "Don't Do It," as a major reason why you don't want to lock in to that monthly payment before you have to.

But now that I realize that the social security rules are as flexible as they are, I believe the decision is more of a numbers game. It hasn't changed my posture, I'm still shooting for age 70, because I'd rather be able to earn without limit through age 66, and I still like the idea of $2425 per month at age 70 rather than $1383 at age 62 (which is - gasp! - THIS November).

So even though, as I said in yesterday's article, paying Uncle Sam back to increase your monthly payment compares very favorably to annuities currently available for purchase, annuities as an investment class are very LOW on the flexibility scale. And being in the investment business, I'd rather have the extra $79,305 (in yesterday's example) to invest rather than the extra $8444 per year for life.

Which leaves me in a logically inconsistent position. That is, even though I would "advise myself" not to take social security at age 62, I would also "advise myself" not to pay it back at no interest when the opportunity arises. These positions cannot both be logical, can they?

As I have reflected on this, I think the answer lies in the good old classic "investment pyramid." You know, the one with all your conservative investments as the base and your speculative investments at the tip. Looking at it that way, the "wait until 70 or buy the annuity" choice adds to the conservative-ness of your posture, while the "take benefits at 62 and don't ever pay them back" choice.

So if I had a sufficient portfolio already, I believe I WOULD pay the $79,305 back to create the extra $8444 per year, even though my risk profile does not make me an "annuity person."

In other words, one should look at one's WHOLE investment/income situation in making this decision. What a shocker! :-) Bob


Douglas said…
I must be missing something here. As I understand the calculations, taking the money early then buying it back at age 70 are equivalent to waiting to age 70 to start collecting, EXCEPT, that:
1. You mitigate the risk of losing all the SS$ you would have earned should you die before age 70
2. You earn net interest on the SS money you collected and invested until age 70.

Now, if the calculations in the payback strategy are correct, why would you ever decide to wait until 70 and not do the payback scheme??
Bob McD said…
Thanks for your comment, Douglas, that was my first reaction as well, and your analysis is correct, provided that you don't need the money, and are disciplined enough to be sure you'll have it to pay back, and also provided that you haven't had so much income that you've lost benefits and/or paid taxes.

In a way, it's a Catch-22. You need to have enough monay and income so you can pay the benefits back but not so much that you have created unnecesary tax liabilities or given up substantial monthly benefits. That can be a pretty narrow window. :-) Bob

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