Social Security’s Lump-Sum Payment Option

The Social Security Administration offers the chance to receive a lump-sum payment of up to six months’ worth of benefits. It’s not a well-known option, but it is available to anyone meeting the basic requirements. There are also caveats to consider.

Retroactive benefits can be claimed by a person who has reached full retirement age (FRA) and is not currently collecting benefits. FRA is currently 66 for those born between 1943 and 1954. It increases in two-month increments for those born between 1955 and 1959. Those born in 1960 or later will not reach full retirement age until they turn 67.

Full retirement age is the year at which a person first becomes eligible for the primary insurance amount. Social Security benefits can be claimed prior to the FRA, but they will be below the primary insurance amount. Conversely, if claiming is postponed, delayed retirement credits increase the benefits until age 70. The increase in benefits is why conventional wisdom calls for delaying the claiming decision until as close as possible to age 70 for those in good health.

After person reaches FRA, he or she can apply for retroactive benefits. The Social Security Administration explains, “You are entitled to benefits beginning the first month in the retroactive period that you meet all requirements (except for the filing of an application) for entitlement. For example, suppose you reach FRA in March 2008 and you are fully insured. You do not file an application for retirement insurance benefits until March 2009. In this case, you may be entitled retroactively beginning with the month of September 2008 (six months before you filed an application).”

You cannot apply for retroactive benefits prior to the attainment of FRA if it “results in a permanent reduction of the monthly benefit amount.” An exception exists for someone who is a surviving spouse or surviving divorced spouse under a disability, and is not yet age 61 in the month of filing.

The lump-sum payment does not come without a penalty, however. The basis for current and future benefits will be based on the earliest date of the period you are requesting retroactive benefits for. This could make the difference of having your benefits based on you being aged 68-1/2 instead of 69, for instance. Furthermore, the lump-sum payment is taxable in the year that it is received. Depending on the size of the lump-sum payment and your other income, you could have 85% of your Social Security benefits taxed instead of 50%.

The lump-sum payment is one of the many options available for claiming Social Security. Before making a claiming decision, think through all of your options to ensure you are making the best one for your situation. If you are unsure, contact a professional who is well-versed in Social Security strategies (not all financial advisers are) for guidance and a second opinion.