Securing A Larger Cash Reserve
Occasionally, a lump-sum can exceed six months in past benefits. If youve 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 hadnt 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 theyre married.
No Retroactive Payouts Are Available Before Full Retirement Age
Based on recent email questions from InvestmentNews readers, I detect an increased interest in lump sum payouts of Social Security benefits, perhaps reflecting the economic uncertainties caused by the COVID-19 pandemic.
It is important to note that lump sum payouts of retroactive benefits are available only under certain circumstances. Even then, inconsistent guidelines from the Social Security Administration seem to have inhibited or delayed some payout requests.
One adviser wrote to me last week saying he had suggested to a soon-to-be-retired couple, where both spouses are 63 years old, that they apply for six months of retroactive Social Security benefits. He was surprised when the Social Security Administration informed the clients that retroactive benefits are not available before full retirement age.
The adviser asked me if that is correct. Yes, it is.
Individuals who are full retirement age or older when they file for Social Security have the right to request a lump sum payment of up to six months of retroactive benefits, beginning no sooner than their full retirement age. Because a portion of their past benefits are paid out in a lump sum, their future monthly benefits will be slightly smaller.
Last month, I received an email from an InvestmentNews reader who shed some light on the murky lump sum request procedure.
I asked the Social Security Administration for an update on how the agency is handling requests for lump sum payments of retroactive benefits.
What Is A Lump Sum Example
A lump sum payment is often associated with a single amount paid to acquire a group of items. For instance, a corporation might pay $50,000 for the inventory and equipment of a small manufacturer that is going out of business. The transaction did not specify any further details. The $50,000 is a lump sum payment.
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To Boost Your Monthly Social Security Payment You Can Choose To Delay The Start Of Your Program If You Change Your Mind You Can Then Claim Back Payments
Most people see Social Security as a programme offering monthly payments for retired Americans and other groups to help towards the cost of essentials. However few know that recipients can also claim a proportion of their entitlement in a lump sum, provided they satisfy certain requirements.
Individuals can begin claiming Social Security payments from the age of 62, but will have to wait until at least the age of 66 to receive their full monthly entitlement. This retirement threshold increases in two-month increments for those born after 1954, culminating with an threshold of 67 years old for those born in 1960 or later.
If you wish to increase the size of your Social Security payment, you can defer the support until you turn 70. This boosts your monthly entitlement once you do start to claim it.
To be eligible for the lump sum Social Security payment you must have reached full retirement age heres everything you need to know about claiming it
Year The Lump Sum Payment Was Made For
This will be the year in which part of your payment was for.
For example: You received $20,000 for the years 2020 and 2021. In this section, you will enter the information solely for the prior 2020 tax year. If your lump sum was for multiple years, enter each year separately starting with the most recent .
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Fact #: Most Older Beneficiaries Rely On Social Security For The Majority Of Their Income
Social Security provides the majority of income to most older adults. For about half of this group, it provides at least 50 percent of their income, and for about 1 in 4 older adults, it provides at least 90 percent of their income, according to multiple surveys and the Census Bureau study.
Most retirees have modest incomes, save for some at the top of the income spectrum. Most low-income older Americans have very little pension income, if any, according to the U.S. Census Bureau study. Among retiree households in the bottom third of the income distribution, most received no pension income. About 1 in 4 of these households lived on less than $20,000 in 2015, and about half lived on $50,000 or less, according to an Social Security Administration study that also matches survey and administrative data.
A Few Other Situations:
- If you already receive benefits as a spouse, your benefit will automatically convert to survivors benefits after we receive the report of death.
- If you are also eligible for retirement benefits, but haven’t applied yet, you have an additional option. You can apply for retirement or survivors benefits now and switch to the other benefit later.
- For those already receiving retirement benefits, you can only apply for benefits as a widow or widower if the retirement benefit you receive is less than the benefits you would receive as a survivor.
If you became entitled to retirement benefits less than 12 months ago, you may be able towithdraw your retirement application and apply for survivors benefits only. If you do that, you can reapply for the retirement benefits later when they will be higher.
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What Is Social Security Disability Back Pay
Back pay is an unofficial but widely used term for what the Social Security Administration calls past-due benefits, payments to cover a period in which you were medically qualified for disability benefits but had not yet been approved to collect them.
Back pay is a common feature of disability claims largely because of how long they can take, particularly if an applicant is initially rejected and challenges the decision. If you win on appeal, a process that can take a year or more, Social Security will, in effect, make good on benefits you would have received had you been approved earlier.
These past-due payments can go back as far as the date of your original application if the SSA ultimately determines that you met its definition of disability being unable to do substantial paying work at the time you filed the claim.
What Is A Retroactive Check From Social Security
You may be entitled to monthly benefits retroactively for months before the month you filed an application for benefits. For example, full retirement age claims and survivor claims may be paid for up to six months retroactively. In certain cases, benefits involving disability up to 12 months may be paid retroactively.
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Understanding The Impact Of The Lump Sum Payment
For a better understanding of how this works, lets look at an example.
Assume your full retirement age is 67 and your benefit at that age is $2,000. But you decide to wait to file for benefits until you are 67 and 6 months old.
You have done the math in your head and realize your full retirement age benefit has increased for each month of delay so instead of $2,000 per month, you will get $2,080.
Yet when you go to the Social Security office to file for benefits, they tell you your benefit will be $2,000 a month and you should expect to receive a lump sum payment of $12,000.
In essence, what the Social Security Administration is saying is, Well give you 6 months of benefits upfront if youll allow us to cut your benefits by 4% for the rest of your life.
This option is certainly tempting, as you may feel as if you have a higher need for funds at this point since youre giving up a paycheck and starting lots of new projects youve had planned for your retirement.
While you were busy working you might have deferred a lot of fun, so the idea of getting a big lump sum right away is pretty exciting, especially when youre not expecting it.
Before making this decision, keep in mind that it might look great at first glance, but there are a few other things to consider.
Should You Opt For Social Security Lump Sum Benefits
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Not many people do, until they apply for benefits.
While this can be a nice option, too many people are surprised by it when it is offered by Social Security reps. Then, they make a quick decision. The result can be they dont receive the benefit package thats best for them because they made a rushed decision and didn’t understand the trade offs.
The lump sum benefit option isnt new. The option’s been available when claiming retirement benefits at your full retirement age or later. Social Security representatives are required to fully explain this choice to eligible applicants, whether they ask about it or not. That can be a source of confusion, because it often is offered at the last minute to people who weren’t expecting it,
Some readers of Retirement Watch indicated to me over the years that their representatives tilted their explanations in favor of the lump sum option, saying that it is a valuable benefit of the program, or that most people take it.
Heres how the lump sum option works.
The lump sum option applies only to people who waited until at least FRA . The option isnt available for those claiming their benefits before FRA.
You can choose to receive a lump sum of up to six months of benefits. That sounds nice. You get a big bonus payment simply by beginning your Social Security retirement benefits.
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The Cost Of Taking The Lump Sum Of Social Security Benefits
First, the amount of your monthly benefit going forward is reduced. Lets walk through an example:
John Smith contacts Social Security and says he wants to start taking Social Security benefits when he hits age 70, receiving the maximum allowable benefit.
Under his earnings history, hes due $4,000 per month.
After hearing the representative explain the lump-sum option, he chooses it and receives a lump sum of around $23,040 .
But taking the lump sum option moves his official beginning age for benefits back to 69 ½ instead of 70, and the monthly benefits hell begin receiving will be based on that age.
Hell receive $3,840 per month, which is 4% less than his maximum benefits at age 70.
Should Clients Take A Lump
We asked advisors what clients should know about this option, available to retirees who claim benefits after full retirement age.
Advice from many experts today is that people should delay claiming their Social Security benefits for as long as possible, or until age 70, when they have to claim them. But what do advisors tell clients who have delayed taking Social Security even after reaching full retirement age , and when they make the claim, the government offers them a lump-sum retroactive payment up to six months?
Should they take it or not, and whats the downside, if there is one?
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Dream Financial Planning Process
Whether you’re managing student loan debt, starting a business, or considering buying your first home, the DREAM Financial Planning Process is tailored to the unique needs of busy professionals is their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. If you’re looking for guidance on: Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments we can help.
Minor Or Child With A Disability
If you are the unmarried child under age 18 of a worker who dies, you can be eligible to receive Social Security survivors benefits. You can also be eligible, if you are up to age 19 and attending elementary or secondary school full time.
Besides the worker’s natural children, their stepchildren, grandchildren, step grandchildren, or adopted children may receive benefits under certain circumstances.
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What Happens If The Deceased Received Monthly Benefits
If the deceased was receiving Social Security benefits, you must return the benefit received for the month of death and any later months.
For example, if the person died in July, you must return the benefits paid in August. How you return the benefits depends on how the deceased received benefits:
- For funds received by direct deposit, contact the bank or other financial institution. Request that any funds received for the month of death or later be returned to us.
- Benefits received by check must be returned to us as soon as possible. Do not cash any checks received for the month in which the person dies or later.
What Are Section 8 Exemptions
Some lump sums are NOT treated as income for social security purposes.
Section 8 determinations allow the Secretary of DSS to exempt certain lump sums for social security income test purposes. Section 8 applies to specific lump sums where the Secretary of DSS has signed the appropriate instrument.
An amount is an exempt lump sum under section 8 if the following apply:
- the amount is not a periodic amount
- the amount is not a leave payment
- the amount is not income from remunerative work undertaken by the person, and
- the amount is an amount, or class of amounts, determined by the Secretary to be an exempt lump sum.
The SSAct does not specify any criteria that must be considered by the decision maker when making a determination under section 8.
When considering whether it is appropriate to provide a section 8 income test exemption, the Secretary or their delegate, will take into account the purpose and nature of the payment. Matters the delegate would consider include:
- whether or not the payment is compensatory in nature
- if the payment is compensatory in nature does it relate to lost capacity to work or non-economic loss , and
- is the payment effectively a form of income support.
Section 8 was introduced, together with amendments to section 1073, on 28 March 1998 to make a fairer and more consistent income test treatment of lump sums by aligning the allowance and pensions income test treatments.
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Social Security Lump Sum Benefit History
The lump sum benefit option isnt new and has been available when claiming retirement benefits at your full retirement age or later. This is usually between the ages of 66 and 70.
Social Security representatives are required to fully explain this choice to eligible applicants, whether they ask about it or not, and since it is offered last minute, a knee-jerk reaction can make the applicant decide to take the offernot fully realizing what they have done until hanging up the phone. The representative may even try and persuade the applicant to take the lump sum by saying things like, Most people take it.
What To Think About Before Taking A Lump Sum Social Security Benefit
The first thing you must understand about taking the lump sum is that it lowers the amount of the annual cost of living adjustment that you will receive. This means that not only is your monthly benefit lower, it doesnt grow as fast as it would from the compounding effect of the increases.
Additionally, you must consider the fact that both lump sums and monthly benefits are counted with your other income when determining how much you owe in taxes. This means that taking a lump sum may result in you having to pay back more of your benefits in taxes.
Perhaps more importantly, taking the lump sum when you go to file for your retirement benefits will lower the amount of eventual survivor benefits if youre the higher earner. Depending on your financial and health situation, this could be an important consideration.
I go back to that all the time in reminding people that your filing decisions will likely affect more people than just you while youre alive. Optimizing for the survivor benefit has to be a part of your decision!
But now I want to hear from you: if you file after full retirement age, will you take the lump sum with a lower monthly payment or no lump sum with a higher monthly payment?
Before you go, if you havent already, you should join the nearly 400,000 subscribers on myYouTube channel! This is where I get into detail about the latest news and policy changes that impact Social Security.
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Modified Adjusted Gross Income For Earlier Year
This will be the Adjusted Gross Income present on your tax return for the year referenced plus any modifications. These modifications consist of IRA contributions, student loan interest expense, foreign earned income exclusion, foreign housing, U.S. tax exempt bonds and interest, employer-paid adoption expense and domestic production activities deduction. Your AGI can be found on the following lines:
Tax Year 2021 – line 11
Tax Year 2020 – line 11
Tax Year 2019 – line 8b.
Tax Year 2018- line 7.