For those individuals who have waited past their full retirement age (FRA) (age 65 to 67, depending in which year an individual was born) to apply to start receiving their Social Security monthly retirement benefit, there is the option that allows an individual to cease their delay, apply for their monthly benefit, and then receive a lump sum payment of retroactive Social Security monthly benefits. While this option sounds very enticing for a Social Security beneficiary who is older than his or her FRA who perhaps recently retired and is in need of an infusion of cash as they start their retirement years, the option has a downside. This column presents the Social Security retroactive benefits lump sum option, including its advantages and its disadvantages.
It is important to first explain how the lump-sum retroactive Social Security payment option works. The purpose of giving a Social Security beneficiary a lump sum payment of retroactive Social Security retirement benefits is to allow this individual/beneficiary who had previously missed his or her planned Social Security filing date to “push back” their retirement date by up to six months. Retroactive benefits comprise a one-time payment the SSA will send an individual when the individual delays filing for their retirement benefits beyond his or her FRA. An individual’s FRA is determined by the individual’s year of birth, as shown in the following table:
Retroactive benefits comprise a one-time payment the Social Security Administration (SSA) will send a beneficiary when the beneficiary delays filing for retirement benefits beyond the beneficiary’s FRA. In other words, when the beneficiary files for benefits after the beneficiary’s FRA, the beneficiary can choose to be paid a lump sum for the months that occurred between FRA and the beneficiary’s filing date. The maximum retroactive payment will cover up to six months’ worth of benefits. To receive the maximum amount, the beneficiary must be passed his or her FRA by six months. If a beneficiary is only three months past FRA, then the beneficiary will receive three months of retroactive benefits.
When the beneficiary files for benefits after his or her FRA and chooses to receive retroactive benefits, the beneficiary’s filing date is pushed back. This creates a permanently lower retirement benefit and survivor benefit. What a beneficiary is doing is trading a lump sum benefit today for a lower monthly benefit for the rest of the beneficiary’s life (and the beneficiary’s spouse’s life). This lower monthly benefit can be up to 4% less.
Consider the following examples:
Example 1. Annie was born in January 1957 and reached her FRA of age 66 years and 6 months in July 2023. Her intention was to start receiving her Social Security in January 2024. But Anne incurred some major expenses during the period August through December 2023 and could benefit from an infusion of cash. Annie contacted the SSA in December 2023 for a retroactive lump-sum payment equal to six months of Social Security monthly payments going back to July, August, September, October, November and December 2023. Annie’s filing date was pushed back to July 2023. Annie’s monthly Social Security benefit payment will therefore not include any delayed retirement credits (DRCs) that permanently increases a beneficiary’s Social Security retirement benefit (DRCs are equal to 2/3 of one percent for every month past FRA a beneficiary delays the start of his or her monthly Social Security retirement benefit).
Example 2. Carl, age 69 was born in September 1955 and reached his FRA of 66 years and 2 months in November 2021. His intention was to start receiving his Social Security in September 2025 right after his 70th birthday. But Carl in early August 2025 incurred some major health care-related expenses and needed some liquid cash. Carl contacted the SSA in early August 2025 for a retroactive lump-sum payment equal to five months (April, May, June, July, August) of Social Security monthly payments. Carl’s filing date was pushed back to March 2025. His monthly benefit payment will not include any DRCs that Carl would have benefited from had he started receiving his monthly Social Security retirement benefit after September 2025.
Perhaps the most significant fact that a beneficiary who elects this lump-sum retroactive Social Security payment option should understand is that the beneficiary l could lose up to six months of DRCs. The DRC is equal to 2/3 of one percent per month of the individual’s FRA monthly benefit amount. If an individual agrees to take the retroactive lump-sum payment, the individual then agrees to a smaller monthly payment. Multiply two-thirds of one percent per month by 6 months results in a 4 percent reduction on the amount the individual was eligible to receive. This reduction is not only permanent for the individual’s benefit amount but also for the surviving spouse’s survivor benefit.
Returning to example 1 above with Annie: Suppose Annie’s monthly benefit in July 2023 (the month she became FRA) was $2,000 per month. Six months later, in January 2024 she is six months past her FRA and her monthly benefit is increased by: Six months times two-thirds of one percent per month, or 4 percent, of $2,000, or $80, to $2,080 per month. If Annie opts for the lump-sum retroactive benefit, the SSA will send her six months times $2,000/month, or a total of $12,000. Also, in place of receiving a monthly retirement payment of $2,080 per month (subject to future cost-of-living adjustments or COLAs) had she started receiving her retirement benefit in January 2024, Annie will receive $2,000 per month starting in January 2024, as if she started drawing her retirement benefit in July 2023. The questions now become: In that case, what is Annie’s breakeven age?
$12,000 (lump-sum payment)/$80/month (extra amount each month with no lump-sum payment)
= 150 months (12.5 years)
In other words, if Annie dies before she, and if applicable, a surviving spouse, becomes age 79 (66 years and 6 months plus 12 years and 6 months), then Annie made the right decision in choosing the lump-sum retroactive payment.
One of the biggest fears for retirees is that they will outlive their savings. Many retirees determine when they will start taking their Social Security benefits based on the fear that they will die young. But that strategy is not realistic. A retiree’s biggest fear should be living too long, not dying too young. In fact, based on Social Security data, a man who reaches age 65 is expected to live on average to age 84.3. A woman who has reached age 65 can expect to live on average to age 86.6.
Another point to consider: The lump-sum retroactive payment will create somewhat more work when it comes to filing one’s federal income taxes if the lump-sum amount includes monthly benefits that were from the previous tax year. The IRS gives an individual two options for calculating any tax due on the portion of the lump-sum that would apply to another tax year, namely; (1) Use the current year’s income to determine the taxable portion of the lump-sum; or (2) Elect to determine the taxable portion of the lump-sum based on one’s income for the earlier year, using the worksheet in IRS Publication 915 (Social Security and Equivalent Railroad Retirement Benefits) (download at https://www.irs.gov/pub/irs-pdf/p915.pdf) and presented here:
Sticking to Your Plan When to Start Receiving Social Security
Any federal annuitant older than his or her FRA who initially decided to delay the receipt of Social Security retirement benefits needs to consider the following two points before opting for the lump-sum retroactive payment.
First, if the original plan were to wait until age 70 to start receiving benefits and the individual is between age 69 and age 70, why change one’s mind now, receiving a less than maximum possible retirement benefit check? By starting to take the benefits before the month one becomes age 70, is this not giving the US government an interest free loan for six months?
Second, the individual needs to think about the tax consequences of a lump-sum payment as well as the possibility that by receiving this lump sum payment could result in the individual’s exceedance of the Medicare Part B and Medicare Part D modified adjusted gross income (MAGI) bracket limitation in two years. For Medicare Part B monthly premium purposes, this could mean an Income-Related Monthly Adjustment Amount (IRMAA) and higher Medicare Part B and Medicare Part D monthly premiums two years in the future.
Social Security benefits should be looked at as longevity insurance that will protect an individual financially if the individual lives to be 100 years old or more. If this is an individual’s thinking, then delaying benefits and not taking retroactive benefits should be a tactic in an individual’s financial planning strategy.