Sizing up Social Security’s lump-sum offer

I’ve waited to apply for Social Security benefits to get the maximum monthly payout. Benefits increase 8 percent a year between one’s full retirement age (66 for me) and age 70. With my 70th birthday on the horizon (a subject for another post), it was time to apply.

A staffer at the downtown Chicago Social Security office called a couple of weeks after I filed the online application. Would I like a retroactive six-month lump-sum benefit? she asked. She made it sound like a bonus, but I was suspicious and asked whether it would reduce my monthly payout for the rest of my life. Indeed, my benefit would have been calculated as if I’d applied six months ago, reducing my monthly check by 4 percent. I declined.

My first thought after ending the phone call was that it’s a sinister government ploy to fool us into taking less money. If I wanted a payout from the last six months, I would have applied last spring. If I weren’t fortunate enough to live off investments for three years since retiring, why would I have put off claiming Social Security?

Research informed me that it’s not always a clearcut decision. A retroactive six-month payment is available to anyone applying for Social Security six months or more after full retirement age, and some people consider it a gift.

Social Security representatives point out the usefulness of a lump sum to a person with an emergency need for cash. A frequent example given is someone diagnosed with a serious disease who needs money for medical care. Another, and sad, example is a claimant who doesn’t have long to live and thus has no reason to spread out payments.

For those of us in more fortunate circumstances, the usual advice is to decline the lump sum. According to Money magazine, those who decline the payout at age 70 and live into our early to mid-80s will more than make up the amount in monthly payments. Yet claimants are lured by the lump sum. “Based on my personal experience, when you explain to someone that they can either receive $3,000 per month, for example, or receive $2,885 per month and get a lump-sum check of $17,310, the vast majority opt for the latter,” a Social Security representative told Money.

What looks even better to some people is file and suspend, which can result in a lump sump exceeding six months in back benefits. People file for Social Security at full retirement age but ask to suspend benefits. The entitlement grows at 8 per cent a year until they ask for the built-up credit. As you can imagine, it can be a significant amount of money — but it’s not a free bonus. Monthly checks thereafter are reduced to the amount to which the recipients were entitled at full retirement age.

Just like the decision about when to start Social Security, deciding about lump-sum payouts can be tricky, advisers say, especially for married people who are thinking about benefits for a surviving spouse. Even a terminally ill Social Security recipient may not want to take a lump sum if it will reduce the spouse’s benefit.

Based on my parents’ ages, I expect to live past 85. I don’t need a cash windfall. But I now realize that taking a lump sum isn’t foolish in all cases. Everyone’s circumstances are different. Social Security is complicated. If your circumstances aren’t as simple as mine, it’s best to get professional advice.

Speaking of advice, when a Security Security representative calls to ask whether you'd like the retroactive six-month benefit, she should explain the ramifications without being asked. People less suspicious than I am may think it's a giveway — only to be surprised when their first monthly Social Security payment arrives and it's less than they planned for.



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  • Thanks for the guidance. I'm 76 and I can you that as you grow older, cash flow is everything. Do not take the lump sum.

  • Thanks for your perspective. People need to realize that the lump sum is not a giveaway.

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