About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
As an individual nearing 70, you’ve intended to delay your Social Security benefits until the decade comes. But in some cases, there are times when you may need the money sooner than expected. Seemingly in the knick of time, there is an option to receive up to six months of benefits in a lump-sum by initiating your Social Security retirement benefits early. While this is an important option to have, what are the consequences of applying early?
Many people are surprised by this opportunity when Social Security representatives provide it to those who may need it most. But unless you truly understand the trade-offs, you might not receive the benefits package that’s most beneficial to you.
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 prior-year benefits.1 For instance, if an individual is granted disability benefits, they will receive a lump-sum to cover the entirety since they initially applied for disability, which may be months or years.
For every month that an individual postpones claiming Social Security benefits beyond full retirement (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, for example, some advisors may recommend that you take the lump-sum amount and the smaller benefit. In this instance, this amount could be passed on to a successor, while your monthly benefit will end at the time of your death.
Alternatively, if you’re a higher-earning spouse that is facing a suddenly shortened life expectancy, you may want to reject the offered lump-sum payment. In this case, the survivor benefit will equal the same amount of your benefit, as the higher-earning partner, upon your death.5 If your surviving spouse has a long life expectancy, the boosted benefit can make up for the forgone lump-sum.
Securing a Larger Cash Reserve
Occasionally, a lump-sum can exceed six months in past benefits. If you’ve met your full retirement age and you decide to delay your benefits, you can file for them and immediately suspend the action, allowing your benefit to grow until you reach 70-years-old.6
In the case of an ill individual who has filed for and suspended their benefits, they may choose to file for a lump-sum to pay their medical bills. If they are 69-years-old and their full retirement age benefit was $2,000, the associated lump-sum is then worth $72,000. If they hadn’t filed and suspended, the lump sum would then be limited to six months of benefits, or $14,400, with a monthly lifetime benefit of $2,400.
Keep in mind that if the beneficiary takes the larger lump-sum worth $72,000, his lifetime monthly benefit will return to the smaller amount of $2,000, along with the survivor benefit, if they’re married.
If you’re interested in even more flexibility, you have the option to file and suspend your benefits more than once. For example, if you decide to file and suspend your benefit of $2,000 at age 66 and upon turning 67 you experience an emergency, you can request a lump-sum payout of one year’s worth of benefits, or $24,000. You can continue to delay your monthly benefit but you will lose the delayed retirement credit of eight percent (the amount you earned during that first year), returning your benefit to $2,000 per month.2
You’ll want to note that by choosing to file and suspend your benefits, you cannot file a restricted application for spousal benefits. A higher earner who files a restricted application can receive spousal benefits while delaying his benefits, which is why an individual should be confident that they do not want to receive spousal benefits from 66 to 70 before filing on their own record.
All in all, if you’re someone who has intended to utilize your Social Security benefits once you turn 70, there are still options for you to receive them earlier. Work closely with your financial advisor in determining the best option for you, as this can help you and your partner avoid making decisions that may adversely affect your retirement.
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