If you need a lump sum of cash on hand when you retire, Social Security offers a lump sum payment option that’s worth six months of benefits for those who have waited beyond full retirement age to draw benefits (for those born between 1943 and 1954 full retirement age is 66). Known as retroactive benefits, the maximum that Social Security offers is six months’ worth of back payments in a lump sum.
This may be a good deal depending on your needs and goals, but it does come at a cost. By taking the lump sum, your retirement date and the amount of your monthly benefit are rolled back six months. So it is important to understand the details before requesting the payment.
When you delay taking retirement beyond your full retirement age, you amass “delayed retirement credits” that increase your benefits by 8 percent for every year that you wait, over and above annual inflation adjustments. By taking the retroactive lump sum payment, you lose the delayed credits that you had accumulated over the previous six months, so your monthly benefit will be lower than if you did not take the lump sum.
Whether you should take the lump sum payment depends on a number of factors, including your life expectancy, your spouse’s needs, and what you will do with the money. Taking the lump sum payment makes more sense if your life expectancy is shorter. In this case, the immediate cash infusion may be more beneficial than bigger monthly payments, especially if you need cash for caregiver expenses. However, if you are married and are the higher earner, you will want to consider your spouse’s needs. If you die, your spouse will receive spousal benefits equal to the monthly amount of your benefits. The higher your benefit, the more your spouse will receive, and that is important when the spouse goes from a two earner household to a one earner.
You also need to consider what you will do with the lump-sum payment. If you are paying off high-interest debt or investing in something with a good rate of return, the lump sum might be better than having the higher monthly payment.
For more information about the retroactive benefit see the Online Social Security Handbook found at https://www.ssa.gov/OP_Home/handbook/handbook.15/handbook-1513.html.