Social Security’s lump-sum benefit is a little-known claiming strategy

Dear Savvy Senior: I’ve read that the Social Security Administration offers a lump-sum payment to new retirees who need extra cash. I haven’t yet filed for my retirement benefits and would like to find out if this is true. What can you tell me? — Born in 1958

Dear Born in 1958: There is indeed a little-known Social Security claiming strategy that can provide 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.

First, let’s review the basics. While workers can begin drawing their Social Security retirement benefits between ages 62 and 70, full retirement age is 66 and 8 months for those born in 1958. However, it rises in two-month increments every birth year to age 67 for those born in 1960 or later.

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 percent to 6.66 percent every year you start before full retirement age. 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 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 your full retirement age of 66 and 8 months, but you changed your mind at 67 and 2 months. You could then claim a lump-sum payment equal to those six months of benefits. So, 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 67 that you wanted to file retroactively, you’d get only four months 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 may 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 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 over $106,000 (or $212,000 for married couples filing jointly), it will increase your future Medicare premiums. See Medicare.gov for details.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org.