A hidden Social Security benefit

By Scott Burns

If you're retired and are interested in having a higher income for as long as you live, you have two main options:

• You can buy a life annuity. This will provide you with an income, with or without inflation adjustments, for as long as you live. But it will leave nothing for your heirs.

• You can buy a variable annuity with a variety of living-benefit provisions. These will guarantee a lifetime income. The income will be less than a lifetime annuity, but you'll have a modest chance of future increases, and you may leave something for your heirs.

Whatever you choose, the only thing certain is a lot of fine print.

Fortunately, there is a simple alternative. It will work nicely for retirees in their late 60s or early 70s who had opted, years ago, to take Social Security benefits at a relatively young age. That's millions of people.

If you did this, you know that your benefits are a lot lower than they would be if you had waited and taken benefits later. Your benefits were reduced because taking benefits early meant Social Security would have to pay benefits for more years.

But you can reapply from scratch with these easy steps. Visit your local Social Security office. Make use of a little-known and seldom exercised provision: Request a "withdrawal of application." By filing SSA Form 521 (.pdf file), Social Security will treat you as if you had never applied for benefits. It will let you immediately reapply for benefits -- at your current age.

Yes, there is a catch. And it's a big one. You must repay every dime you've received in past benefits. But because Social Security charges no interest, reapplying turns out to be a really good deal. It represents a way to buy an inflation-adjusted annuity for a price that beats anything offered by the financial-services industry.

Here is how it works. If you apply for Social Security benefits before your full retirement age, your benefit is reduced for each month you take it early. If you delay taking benefits beyond your full retirement age, your benefits are increased for each month of delay.

For example, if you were born between 1943 and 1954, your full retirement age is 66. If you retire at age 62, your benefit will be 75% of what you would have received if you had waited until age 66. In addition, those born in this period will receive an increase in benefits for each month of delay beyond their full retirement age. The increase is two-thirds of 1% a month, or 8% a year. At age 70 (when increases in benefits stop), your benefit would be 132% of your full retirement benefit.

Now let's put that together. If your benefit at 62 is 75% of your full retirement benefit and your benefit at 70 is 132% of your full retirement benefit, your monthly check could increase by as much as 76%. (The benefit will also be adjusted for inflation over the period.)

How it works: An example

If your benefit was $1,000 a month at age 62, you'd have to return $96,000 at age 70 in order to receive a benefit increase of $760 a month. That's $9,120 more a year. (I'm ignoring inflation adjustments.) In effect, you are buying an inflation-adjusted life annuity with an annual payout starting at a stunning 9.5% of your initial "investment" -- the return of money you'd received earlier in benefits.

Continued: You can't find a better payout

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