Social security as an investment

by Stephen Butler

The farmer who was asked why his pig had a prosthetic leg said, "Because we're saving the rest of him to eat later." In a similar vein, here's a new slant on deciding when to belly up to that Social Security feeding trough.

Most people who are still working tend to postpone the start date until at least 66 and some will decide to wait until age 70. Waiting until 70 generates 135 percent of whatever the age 66 benefit schedule might have been which is tempting. But we could all die earlier than we expected --- and get nothing.

If someone starts their benefit at age 63, accepting 62 percent of what could have been their benefit beginning at age 70, they can CHANGE THEIR MIND LATER. That's right. They can engage in a "Request for Withdrawal of Application." Form SSA-521 allows one to be expunged from the records. All they have to do is give back all the money they collected.

It may sound draconian and pointless until we recall the Urban Legend of the bank robber who steals millions, leaves the country, and then turns himself in and returns the money 10 years later. After serving a lenient sentence he gets to spend the rest of his life enjoying all the money in interest earnings that his ill-gotten gains produced over 10 years.

In the case of Social Security, someone could collect, between age 63 and age 70, about seven years worth of benefit. If they invested the money (or didn't have to dip into savings) in a good balanced fund or an Index fund, there's a high probability that they would generate substantial earnings over seven years. So, they return the actual payments to the SSA and keep what they made.

Now, they are moving forward with a monthly income that is 62 percent higher than that which prevailed the previous month. In my case, that would be about $1,100 more per month. Future percentage cost of living increases will apply to a much higher dollar amount.

In actual dollars, I would be receiving about $22,000 per year today if I took the money at my current age 63. Over seven years, this would be a cost of $154,000 if I had to give it all back to get a higher Social Security check starting at age 70.

However, if I had the money to invest at 10 percent, I would have about $200,000 assuming stock market returns of about 10 percent. The fly in the ointment here, as always, is the tax I have to pay.

This messes things up considerably. Instead of $22,000 each year, with a marginal tax bracket of 35 percent state and federal, I would be lucky to pocket $15,000 a year net after the highest tax I pay on this additional income.

This leaves me with only about $126,184 and that's before paying capital gains as I cash in the investment.

If I somehow scrape together the $154,000, however, I get an additional $13,500 per year at age 70. With inflation adjustments, that could easily rise to over twice that amount in my lifetime.

There is a way out. Anyone still working can deposit up to $20,500 into a 401(k) even if this is the total amount of income that they make on a job. Any semi-retired, part-time employee typically not contributing to any retirement plan, could deposit all of their paycheck into the plan and live on their new, early Social Security payout. While a little circuitous, they have effectively deposited their Social Security money into their 401(k) where it can continue to compound on a tax-deferred basis. They are paying tax on the Social Security money, but they simultaneously created an equivalent deduction by way of the 401(k) deposit. They're tax neutral.

The important "takeaway" here is that enjoying the smug satisfaction of at least getting something from Social Security does not slam the door on the possibility of coming back for more at the higher age 70 level. Earnings on the money aren't the only source of funds for a later buy-in.

Selling a home, receiving an inheritance or a lump sum payout of a retirement account — all are possible ways to find the money. In the end, the decision rests with overall health and genes.

At age 70, apply for a life insurance policy to see how long the experts think you're going to live. If it looks like another twenty years, the U.S. government offers what amounts to the best annuity in town — one that will effectively pay out about 10% per year (the value of the additional income as a percent of the buy-back) PLUS that payment backed by the U.S. government is guaranteed to rise with the cost of living. If inflation really soars, this "annuity" bought with today's cheaper dollars will be tough for any investment product to beat.

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