Dear Savvy Senior,
In light of the stock market crashing, I’ve heard that Social Security offers a lump-sum payment to new retirees who need some extra cash. I have not yet filed for my retirement benefits and would like to investigate this option. What can you tell me?
Seeking Cash
Dear Seeking,
There is indeed a little-known Social Security claiming strategy that’s been around for many years that can provide retirees a lump-sum benefit, but you need to be past your 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 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. But if you claim earlier, your benefits will be reduced by 5 to 6.66 percent every year you start before your full retirement age. While if you delay taking your benefits beyond your full retirement age, you’ll get 8 percent more each year until age 70.
Lump Sum Option
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 for example that you were planning to delay taking your Social Security benefits past your full retirement age of 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 was $2,500 per month, you would be entitled to a $15,000 lump sum payment.
If you decided at age 66 and three months that you wanted to file retroactively, you’d get only three months’ worth of benefits in your lump sum, because SSA rules prohibit you from claiming benefits that pre-date your full retirement age.
Drawbacks
The downside to this strategy is that once you accept a lump-sum payment, you’ll lose the delayed retirement credits you’ve accrued, and your future monthly retirement benefit will be reduced to reflect the amount you already received. It will also affect 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.
The federal government taxes up to 50 percent of Social Security benefits at ordinary income tax rates if your combined income – defined as adjusted gross income plus nontaxable interest income plus half of your Social Security benefits – exceeds $25,000, and up to 85 percent of benefits are taxable if combined income exceeds $34,000. For married couples, the comparable income thresholds for taxing benefits are $32,000 and $44,000.
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.
In addition, if the lump-sum payment of retroactive Social Security benefits boosts your yearly income beyond the $85,000 level, it will increase your future Medicare premiums too. See Medicare.gov/Pubs/pdf/11579-medicare-costs.pdf for details.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.