05/12/2014 06:28 pm ET Updated Jul 12, 2014

Social Security Do-Over: An Interest-Free Loan

Social Security has a do-over rule, a way to collect benefits, yet still give you a chance to change your mind, and wait until you are older to get a bigger monthly retirement payment.

It's something that should be more widely known, especially in these days of economic insecurity for so many older workers.

You can begin drawing Social Security retirement benefits as early as age 62, but you face a penalty, getting 25 percent less than you would receive at age 66, now the age for getting full benefits. Example: Mary will get $1,000 a month at age 66. But she decides to apply at age 62, and her check will be a much lower $750 a month. This is a permanent reduction.

But Mary has flexibility. Let's say she is now 62, and had long been planning to wait to age 66 before drawing Social Security. Her plans went awry when she lost her job, suddenly and unexpectedly. Now she needs the money, and needs it quickly. She files for Social Security and begins collecting the $750 a month. She does this for 10 months, and then gets a job.

Mary can repay the $7,500 she collected from Social Security, and there is no penalty. And no interest charges for the benefits she received. Now she has used the do-over provision, and she can wait till age 66 according to her original plan to delay benefits so she would get a bigger check.

Mary has gotten what amounts to a tax-free loan from the Social Security system. The key rule is that she has to stop the benefits within a 12-month period, in order to go back to her previous status as someone who isn't drawing retirement benefits. If she waits more than a year, she will be stuck with the permanent cut in benefits, the $750 a month.

Now she can wait till age 66 and begin drawing $1,000 a month.

Things can get even better if she is financially able to wait longer before collecting benefits. For every year after age 66, Mary will get an 8 percent boost in her benefits. She doesn't have to work in those years. She just has to delay collecting benefits.

Mary waits till age 70 to maximize her check. The 8 percent bonus every year for four years will give her a check of $1,320 a month, starting at age 70. She gets this amount, plus an annual cost-of-living increase for the rest of her life. Unlike traditional pensions, Social Security has a guaranteed inflation adjustment every year.

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