Turning 62: Have your retirement cake and eat it, too

— -- Most financial decisions require trade-offs. If you want to earn better-than-average returns in the stock market, for example, you need to tolerate above-average risk. Similarly, an adjustable-rate mortgage offers lower initial payments than a fixed-rate mortgage. But if interest rates rise, you and your furniture could end up on the sidewalk.

America's oldest baby boomers, who are turning 62 this year, face similar trade-offs in deciding whether to claim their Social Security benefits early. A little-known Social Security option, though, gives early retirees a way to have their cake and eat it, too.

Here's the quandary: If you claim benefits at 62, you can retire while you're young enough to enjoy it, but you'll receive reduced benefits for the rest of your life. By contrast, waiting to file until at least full retirement age (66 for boomers who turn 62 this year) will increase your monthly payments, reducing the risk that you'll run out of money in your old age. For many boomers, though, that means working longer — a hard pill to swallow if you hate your job and want to spend more time with your grandchildren.

What most retirees don't realize is that they can change their minds. Under the Social Security Act, individuals who receive early-retirement benefits from Social Security can withdraw their application, repay the benefits they've received and refile for higher benefits at a later date, says Mary Jane Yarrington, senior policy analyst for the National Committee to Preserve Social Security and Medicare.

Of course, for this strategy to work, you have to rustle up enough money to repay all the Social Security benefits you've received. You don't, however, have to pay interest on the benefits. And depending on your situation, you could still fare better than if you'd kept receiving reduced Social Security benefits, says Laurence Kotlikoff, a Boston University finance professor and developer of ESPlanner, a financial-planning software program.

Kotlikoff offers this example: A 70-year-old retiree has $400,000 in regular assets and $200,000 in retirement savings. She claimed early-retirement benefits and receives $11,556 a year. Had she waited until age 70 to file, her benefits would total $20,000 a year.