As an individual, you might have intended to delay your Social Security benefit. However, you are suddenly caught in a situation where you need the money sooner than expected. Unbeknownst to many, there is an option to receive up to six months of benefits in a lump-sum by initiating your Social Security retirement benefits early.
What Is the 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. Choosing this option also means that your future monthly benefits would reflect a retirement age of 69 1/2 moving forward. That's why it's important to note that while you would receive a large amount upfront, your monthly benefits would be less than if you did not take the lump-sum payment and kept your retirement age at 70.
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, a person turning 62 this year who was earning an annual income of $60,000, would receive a different Social Security benefit depending on what age they decided to claim the benefit, which is estimated below:
- 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 your Social Security benefit beyond that age is unnecessary. Annual cost-of-living adjustments would also be applied to the larger base amount moving forward.4
Possible Lump Sum Scenarios for Individuals or Spouses
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. If your surviving spouse has a long life expectancy, the boosted benefit can make up for the forgone lump-sum.
Deciding whether or not to take the lump-sum payment option can depend on a variety of factors - what you intend to use the money for, your life expectancy, etc. Work closely with your financial advisor in determining if taking this payment is right for you, as this can help you and your partner avoid making decisions that may adversely affect your retirement.