Dear Savvy Senior: I’ve heard that Social Security offers a lump-sum payment to retirees who need some extra cash. I have not yet started drawing my benefits and would like to investigate this option. What can you tell me? — Almost Retired
Dear Almost: There are actually two different kinds of Social Security claiming strategies that can provide retirees a big lump-sum benefit, but you need to be past full retirement age to be eligible, and there are financial drawbacks you need to be aware of, too.
First, let’s review the basics. Remember that while workers can begin drawing their Social Security retirement benefits anytime between ages 62 and 70, full retirement age is currently 66 for those born between 1943 and 1954, but it rises in two-month increments to 67 for those born in 1960 and later. You can find your full retirement age at ssa.gov/pubs/ageincrease.htm.
At full retirement age, you are entitled to 100 percent of your benefits. If you claim earlier you’ll receive less, while if you delay you’ll get more — roughly 8 percent more for each year until age 70.
If you are past full retirement age and have not yet filed for your benefits, the Social Security Administration offers a retroactive lump-sum payment that’s worth six months of benefits.
Here’s how it works. Let’s say you were planning to delay taking your Social Security benefits past age 66, but you changed your mind at 66 and six months. You could then claim a lump-sum payment equal to those six months of benefits. So, for instance, if your full retirement age benefit were $2,000, you would be entitled to a $12,000 lump sum payment.
If you decided at age 66 and four months that you wanted to file retroactively, you’d get only four months’ worth of benefits in your lump sum, because SSA rules prohibit you from claiming benefits that pre-date your full retirement age.
Another option that provides even more cash is the “file and suspend” strategy.
Again, this option is only available to people on (or after) full retirement age.
Here’s how this strategy works. Let’s say you’re 66, and you decide to delay your benefits. You could file for your benefit and then immediately suspend it. This gives you the ability to collect a lump sum going back to the date you filed. So if you need money at age 69 for example, and your full retirement age benefit was $2,000, you could get a three-year lump sum of $72,000.
The big downside to these strategies is that once you accept a lump-sum payment, you’ll lose all the delayed retirement credits you’ve accrued, and your future monthly retirement benefit will be reduced to reflect the amount you already received.
Here’s an example of how this works. Let’s say that you are entitled to a $2,480 monthly benefit at age 69. By taking a three-year lump sum payment, your future benefits will shrink back to $2,000 per month, which is what you would have received at your full retirement age. This also affects your future survivor benefit to your spouse or other eligible family members after you die.
You also need to consider Uncle Sam. Depending on your income, Social Security benefits may be taxable, and a lump-sum payment could boost the amount of benefits that are taxed. To help you calculate this, see IRS Publication 915 “Social Security and Equivalent Railroad Retirement Benefits” at irs.gov/pub/irs-pdf/p915.pdf, or call 800-829-3676 and ask them to mail you a copy.
One other caveat: If you’re married and you “file and suspend” your Social Security benefit, you cannot file a “restricted application” too, which gives you the ability to collect spousal benefits while delaying your own retirement benefit past full retirement