You intended to delay Social Security benefits until age 70, but at 68 you need the money and apply for benefits. Surprise: The Social Security Administration offers you a lump sum payment that's worth six months of benefits. Sounds nice, but accepting the money has consequences.
Here's how the offer works. If you delay applying for your benefit until after your full retirement age (66 for those applying now), you earn delayed retirement credits of 8% a year. When you finally apply, you can accept a monthly benefit that includes all the delayed credits. Or you can accept a lump sum worth six months of retroactive benefits—but your monthly benefit will shrink to the amount you would have received if you had applied six months earlier. "You are giving up delayed retirement credits," says Marc Kiner, co-founder of Premier Social Security Consulting, in Sharonville, Ohio.
Say you would have received $2,320 a month at 68. You opt for a lump sum worth six months of benefits. Your monthly lifetime benefit will be worth what you would have received at age 67 and 6 months, or $2,240. Your lump sum will be $13,440—six months of that $2,240 benefit. If you apply at age 66 and three months, the lump sum will be worth three months of benefits.
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Singles who are suddenly diagnosed with a terminal illness should take the lump sum and the smaller benefit. The lump sum could go to an heir, while the monthly benefit will end at the beneficiary's death.
But a higher-earning spouse faced with a suddenly shortened life expectancy should probably reject the lump sum. The survivor benefit will equal 100% of the higher earner's benefit at his or her death. If the surviving spouse has a long life expectancy, the boosted survivor benefit can more than make up for the relinquished lump sum.
Ensure a Larger Cash Reserve
In some cases, a lump sum can exceed six months in back benefits. Say you're full retirement age and you decide to delay your benefit. You can file for your benefit and then immediately suspend it, which lets your benefit grow until you reach 70. If you need a wad of cash earlier, say, at age 69, you can request a lump sum of up to three years. "You can go back and undo the decision" to delay, says William Reichenstein, a principal of Social Security Solutions. (Kiplinger's has partnered with the firm; go to kiplinger.socialsecuritysolutions.com for a customized report to maximize your benefits.)
Consider a beneficiary who filed and suspended. At 69, he is diagnosed with a terminal illness and files for a lump sum to pay medical bills. If his full retirement age benefit was $2,000, that pot of cash is worth $72,000. If he hadn't filed and suspended, the lump sum would be limited to six months of benefits, or $14,400, with a monthly lifetime benefit of $2,400.
However, if the beneficiary takes the larger lump sum worth $72,000, his lifetime monthly benefit will return to the smaller amount of $2,000—and so will the survivor benefit, if he's married.
If you want even more flexibility, you can file and suspend more than once. Say you file and suspend your benefit of $2,000 at age 66. At 67, you need money for an emergency. You can request a lump sum payout of one year's worth of benefits, or $24,000. You can then continue to delay your monthly benefit. You will lose the delayed retirement credit of 8% you earned for that first year, returning your benefit to $2,000 a month. But if you then continue to delay taking your benefit until age 70, you can earn three years of delayed retirement credits, boosting your benefit to $2,480.
One caveat: By filing and suspending, you cannot file a "restricted application" for spousal benefits, says Elaine Floyd, director of retirement and life planning for Horsesmouth, a New York–based adviser training company. A higher earner who files a restricted application can receive spousal benefits while delaying his benefits. "A person had better be sure he does not want to receive spousal benefits from age 66 to 70 before filing on his own record," she says.
Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger’s Social Security Solutions today.
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