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How the Social Security Lump Sum Benefit Works: Pros & Cons

Last update on: Mar 16 2020

Do you know there’s an option to receive up to six months of benefits in a lump sum when initiating Social Security retirement benefits?

Not many people do, until they apply for benefits.

While this is a nice option, too many people are surprised by it, and don’t receive the benefit package that’s best for them due to confusion over their choices.

The lump sum benefit option isn’t new. When claiming retirement benefits at your full retirement age (FRA) or later, you have the option.

In fact, Social Security representatives are required to fully explain this choice to eligible applicants.

Yet, some people don’t understand the choice after being offered it at the last minute.

Some readers indicated to me that their representatives tilted assets in favor of the lump sum option, saying that it is a valuable benefit of the program, or implying that most people take it.

Here’s how the lump sum benefit option works.

The lump sum option applies only to people who waited until at least the full retirement age (age 66 for those born in 1943-1954, and over age 66 on a sliding scale for those born after 1954).

The option isn’t available for those claiming their benefits before the full retirement age.

Also, while you can choose to receive a lump sum of up to six months of benefits, there’s a cost to taking the lump sum benefit option…

Your retirement date, and the amount of your monthly benefit, is rolled back six months.

For example, Max Profits contacts Social Security and says he wants to begin benefits at age 70, receiving the maximum allowable benefit.

Under his earnings history, he’s due $3,000 per month.

After hearing about the lump sum option, he chooses it. Max receives a lump sum of $17,310 (six months of his age 69½ monthly benefit).

But his official beginning age for benefits is age 69½ instead of 70, and his initial monthly benefits are based on that age.

He’ll receive $2,885 per month. That’s 4% less than his maximum benefits for age 70. (Remember, by delaying benefits after FRA, your benefits increase 8% annually through age 70.)

Was this a good deal for Max?

It depends on several factors. One factor is how long Max lives.

By taking the lump sum, Max is receiving $115 less in monthly benefits.

If Max had decided not to take the lump sum, it would have taken about 12½ years for that extra $115 per month to equal the lump sum he received.

So, if he lives into his mid-80s, the higher monthly benefit probably would have been the better move. If he doesn’t live that long, taking the lump sum is better.

Of course, what Max would do with the lump sum is another important consideration.

If he uses it to pay off debt, especially high-interest debt, that might be more valuable than the 4% increase in benefits.

Or if he invests the lump sum well, he’ll end up with more money than if he had taken the higher monthly benefit.

If Max is married, that status also should factor into his decision. When one spouse dies, the household stops receiving two Social Security benefits.

The surviving spouse receives only the higher of his or her earned benefit or what the other spouse was receiving at death.

If Max is the higher-earning spouse, it might make sense for him to maximize his monthly benefit so that whichever spouse survives has the highest possible monthly benefit for life.

The right choice depends on your longevity, what you would do with the lump sum and your spouse’s needs.

If you began benefits recently and believe the benefit amount is wrong, contact Social Security. You can call toll free at 800-772-1213 or visit a local Social Security office.

You also can contact Social Security through its website. You should have copies of your original claim forms and be prepared to explain why your benefit is wrong.



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