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Prop up your dwindling retirement account balance

Did you receive Social Security benefits before you reached full retirement age? TODAY Financial editor Jean Chatzky explains how to get the most out of your Social Security benefits, even if you collected early payments.
/ Source: TODAY contributor

What's the antidote to a retirement account balance that just isn't what it used to be? It may mean working a few more years, reducing the amount you plan on withdrawing every year, or even a reverse mortgage. But there's another alternative to consider: backtracking on Social Security.

If you've been reading this column for a long time, you know I recommend waiting until full retirement age (older than 65) before you start taking Social Security benefits. According to the Social Security Administration (SSA), doing so makes sense because it can increase your monthly check by about 30 percent. But what if you didn't get that information? What if you started taking payments at 63, or at any time earlier than the full retirement age?

You may not be out of luck. There's a way to put the smaller payments back into the system and start drawing the larger ones out. It's called double dipping, and here's what you need to know:

The basics
With more than 2,000 rules in the Social Security handbook, it's certainly easy to get confused. But this is a concept you need to grasp tightly. Essentially, your yearly benefit increases by about 8 percent for every year you postpone taking it after the age of 62. That's on top of the adjustment the SSA makes each year for cost of living. Knowing this, it's easy to see why the general advice is always to wait — if you can swing it financially. But if you've already jumped the gun, you can file a form 521 (Request for Withdrawal of Application) and pay those benefits back with no interest required. At this point you'll be eligible to receive the larger benefit as if you've been waiting all along.

Time it right
You know that the best time to do this is at full retirement age, but there's actually more to it than that, says Pam Villarreal, a policy analyst with the National Center of Policy Analysis. "There is kind of an optimal age. If you take early retirement benefits at age 62 and pay them back at age 70, you're going to increase your living standard far more than if you took retirement benefits at age 62 and then paid them back at age 76, because your life expectancy is going to be shorter." Not only that, but the longer you wait to file the 521, the more you'll have to pay back and the less time you'll have to enjoy the increased benefits. Aim for age 70, if you can.

Plan ahead
The key to making this work is actually having the money to pay back when it comes time to do so. There are people who see this as a strategy — you take the money starting at 62, stash it where it'll earn you some interest for the next seven or eight years, and then pay it back. It's more or less an interest-free loan from the government, and it's made even more attractive by the fact that the amount you pay back isn't even adjusted for inflation. But if you end up squandering the money — or losing it in a risky investment — you're stuck with the lower benefit for life. So you have to plan this out and have another source of income you can draw on in the meantime — either a retirement account, or the aforementioned part-time job. If you don't have something like that — and if it's not something you can really count on — this strategy isn't for you.

Weigh the risks
The main risk, according to Dr. Laurence Kotlikoff, an economics professor at Boston University and co-author of "Spend 'Til the End," is that the government will eliminate this loophole and you'll have already taken the lower benefit. However, he says that as of now, he hasn't seen any indication of that happening — in fact, the SSA seems to be very willing to accept the form 521. "The option to withdraw a Social Security application and re-file has been around since the 1960s and the administration doesn't have a recommendation one way or the other. It's a personal decision that needs to be made by the beneficiary," says SSA spokesperson Kia Green.The other risk is that you may not live as long as you expect, in which case you'll pay back the money, only to receive the higher benefit for just a year or two in return. These are both scenarios you'll want to consider carefully. You should know the other, less risky ways of maximizing your benefit as well. Running the numbers before you file can do a lot of good, particularly if you have to decide between taking spousal benefits and your own. The SSA has a few calculators on its Web site that can help. In addition, if you're divorced and haven't remarried, you're eligible to tap into your ex's benefit, provided you were married for at least ten years.

With reporting by Arielle McGowen

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .