4 secret Social Security jackpots

By Kiplinger's Personal Finance Magazine

Some retirement decisions are irreversible. But many retirees will be happy to learn that choosing when to start collecting Social Security benefits is not one of them.

When John Rothenhoefer, 70, found out he could increase his Social Security benefits by about $1,000 a month by taking advantage of a do-over strategy, he thought he'd struck gold. As it turns out, he might as well have won a lottery.

Out of the 32 million retirees who collect Social Security benefits, Rothenhoefer has been one of just several dozen people this fiscal year to take advantage of an obscure option that lets you halt your current benefits, pay back all you have collected interest-free and restart your benefits at a new, higher rate based on your current age.

It's perfectly legal, says Mark Lassiter, a spokesman for the Social Security Administration. But don't expect the claims representatives at your local Social Security office or the employees who answer the agency's toll-free number (1-800-772-1213) to be familiar with the details.

"Our service representatives can go an entire career and never encounter this situation," Lassiter says. He recommends that you download Form 521 "Request for Withdrawal of Application," (.pdf file) from the agency's Web site and visit your local office in person.

This strategy is just one of four little-publicized ways we uncovered to help you maximize your Social Security benefits. Each tactic applies to a specific situation. If one of them is yours, you could be in the money.

A sweet deal

For someone such as Rothenhoefer, who had been collecting monthly checks for eight years, the price of repaying Social Security benefits can be steep: $100,000 or more in some cases.

But he thinks it's well worth it. Not only will his monthly check be about 75% larger than his previous benefit, but it will also increase with inflation each year for the rest of his life. And if he dies first, his wife, Charlotte, 67, will collect the same monthly amount as a survivor benefit for as long as she lives.

Here's how it works: Let's say you qualify for full benefits of $1,600 a month at your normal retirement age of 66 but decide to begin collecting your benefits at 62. Your retirement benefits will be reduced by 25% for the rest of your life -- to $1,200 a month, in this example -- because you'll collect a smaller benefit for a longer period.

On the other hand, if you delay collecting benefits, you will receive an 8% credit for every year beyond your normal retirement age until you reach 70, when your maximum benefit will be 132% of what you would have received at age 66. In this example, you would receive about $2,100 a month at 70 -- a $900 difference.

Maybe you decided to collect benefits early out of fear that you wouldn't live long enough to collect the larger, delayed benefit. But now that you've made it to 70, you may regret your decision and wish you were receiving a larger check.

In order to get one, you must first file Form 521 at your local Social Security office to request a withdrawal of your application for benefits. Your retirement benefits will stop almost immediately, and if your husband or wife receives spousal benefits based on your work record, his or her benefits will stop, too. Then the Social Security Administration will send you a letter telling you how much you need to repay, including any spousal benefits. That process may take several weeks. Once you repay the benefits, you can reapply for new, higher payments based on your current age.

If, for example, you received $1,200 a month starting at age 62, plus annual cost-of-living adjustments through age 70, you would have to repay about $130,000. That's a lot of money, but for some people it's worth the price to get an additional $900 a month in retirement. By comparison, it would cost a 70-year-old man about $190,000 to buy an immediate annuity that would provide $900 a month initially, plus annual inflation adjustments and a 100% survivor benefit. That's 46% more expensive than "buying" a lifetime annuity from Social Security.

Continued: Sweet deal

 1 | 2 | 3 | next >