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Is a Lump-Sum Social Security Payment Right For You?

Today were are talking about the option to receive up to six months of benefits in a lump-sum by initiating your Social Security retirement benefits early. This sounds too good to be true. So, what's the catch?

Let's jump right in.   

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.

This choice does not come without drawbacks.  If you were delaying taking your benefit until age 70 in order to take advantage of the full amount of delayed credits you may be surprised when the SSA rep asks if you would like a lump sum. Is the government so generous as to give you free money?  "Congrats on making it to 70, here's your big surprise!".

I'm sure you already know the answer to this one.  When you decide to take the cash, your claiming age will also revert back 6 months. Your monthly benefit amount will be reduced permanently.  This doesn't mean it's the wrong decision to take the lump sum, just one that should be analyzed in the overall context of your retirement income plan.  

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, you may want the cash up front.  You aren't expected to live long enough to benefit from the higher monthly amount and it won't be left to anyone as a survivor benefit.

If you’re a higher-earning spouse and have a shortened life expectancy, you may want to reject the offered lump-sum payment. This way your spouse will be left with the higher monthly benefit for the remainder of their life.  If your surviving spouse has a long life expectancy, the boosted benefit can make up for the forgone lump-sum. 

So, can you just tell me what the right decision is?

At the end of the day, the one thing we can be absolutely certain of is that the decision you should make is...

...completely dependent on the rest of your financial and physical situation. It's probably best to talk to your advisor about what decision makes the most sense for your specific plan.  If you don't have a plan, we'd be happy to help you get one started.  Schedule a no-obligation, 15 minute phone call today.

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  1. https://www.irs.gov/pub/irs-pdf/p915.pdf
  2. https://www.ssa.gov/planners/retire/delayret.html
  3. https://smartasset.com/retirement/social-security-calculator#0VNBxoOJE2
  4. https://www.ssa.gov/pubs/EN-05-10147.pdf

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.