As an individual nearing 70, you’ve intended to delay your Social Security benefits until the decade comes. But in some cases, there are times when you may need the money sooner than expected. Seemingly in the knick of time, there is an option to receive up to six months of benefits in a lump-sum by initiating your Social Security retirement benefits early. While this is an important option to have, what are the consequences of applying early?
Many people are surprised by this opportunity when Social Security representatives provide it to those who may need it most. But unless you truly understand the trade-offs, you might not receive the benefits package that’s most beneficial to you.
What Is a Lump-Sum Social Security Payment?
A lump-sum payment is a one-time Social Security payment received in the current year for up to six-months of prior-year benefits, or backpay.1 For example, if you begin claiming Social Security benefits at the full retirement age of 70 and choose to take the lump-sum, you would receive a one-time payment reflecting what your benefits would have been over the past six months. Choosing this option also means that your future monthly benefits would reflect a retirement age of 69 1/2 moving forward. That's why it's important to note that while you would receive a large amount upfront, your monthly benefits would be less than if you did not take the lump-sum payment and kept your retirement age at 70.
For every month that an individual postpones claiming Social Security benefits (up to age 70), they earn an additional 0.66 percent per month or eight percent per year in delayed retirement credits.2
For example, if a person turning 62 this year was earning an annual income of $60,000, here's how their Social Security benefits would differ depending on what age they decided to begin claiming them:
- Age 62: $22,019, or $1,834 per month
- Age 66: $29,359, or $2,446 per month
- Age 70: $38,930, or $3,244 per month3
It’s important to acknowledge that retirement credits end at age 70, so delaying claiming your Social Security benefits beyond that age is unnecessary. Annual cost-of-living adjustments would also be applied to the larger base amount moving forward.4
Individuals vs. Spouses
Just like taxes, there are differences in benefits based on whether you’re single or married. If you’re a single individual who has been diagnosed with a terminal illness, for example, some advisors may recommend that you take the lump-sum amount and the smaller benefit. In this instance, this amount could be passed on to a successor, while your monthly benefit will end at the time of your death.
Alternatively, if you’re a higher-earning spouse that is facing a suddenly shortened life expectancy, you may want to reject the offered lump-sum payment. In this case, the survivor benefit will equal the same amount of your benefit, as the higher-earning partner, upon your death.5 If your surviving spouse has a long life expectancy, the boosted benefit can make up for the forgone lump-sum.
Previous File & Suspend Lump-Sum Options
In previous years, the Social Security Administration (SSA) allowed retirees to access lump-sum benefits greater than six months using a "loophole" - filing and immediately suspending benefits. Starting April 30, 2016, the SSA stopped offering backpay on suspended benefits. If you choose to voluntarily suspend your benefits, the SSA will now only "permit benefit reinstatement beginning with the month after the month of your request," according to their website.6
Before this change, if you had met your full retirement age and decided to delay your benefits, you could file for them and immediately suspend the action, allowing your benefit to grow until you reached 70-years-old.6
Deciding whether or not to take the lump-sum payment option can depend on a variety of factors - what you intend to use the money for, your life expectancy, etc. Work closely with your financial advisor in determining if taking this payment is right for you, as this can help you and your partner avoid making decisions that may adversely affect your retirement.