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.
Or 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 opted, years ago, to take Social Security benefits at a relatively young age. That's millions of people.
If you did this, you know your benefits were reduced because taking benefits early meant Social Security would have to pay benefits for more years.
But you easily can reapply from scratch. Visit the local Social Security office. Make use of a little-known and seldom-exercised provision - request a "Withdrawal of Application." By filing an SSA Form 521, 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.
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 percent of what you would receive if you 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 percent a month, or 8 percent a year. At age 70 (when increases in benefits stop), your benefit would be 132 percent of your full retirement benefit.
Now let's put that together. If your benefit at 62 is 75 percent of your full retirement benefit and your benefit at 70 is 132 percent, your monthly check could increase by as much as 76 percent. (The benefit will also be adjusted for inflation.)
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 percent of your initial "investment" - the return of money you'd received earlier in benefits.
Now ask yourself a simple question. Where can you find a financial product that will deliver an initial payout of 9.5 percent and adjust it every year, for the rest of your life, at the rate of inflation?
You won't get a 9.5 percent initial payout with guaranteed inflation rate increase from any of the living-benefits variable annuities. You won't get it from any of the new mutual funds geared to producing lifetime income. And you won't get it from a commercially available life annuity.
It gets better.
By reducing investment income and increasing Social Security benefits, many retirees will be able to reduce their income taxes and, quite possibly, avoid the taxation of Social Security benefits.
I've been writing about the Torpedo Tax - the taxation of Social Security benefits - for at least five years. You get more certain income from deferring Social Security benefits than you can get from virtually any financial product. Deferral is particularly beneficial for married men.
Scott Burns is a syndicated columnist. He can be reached at email@example.com.