Monday October 26, 2020
Social Security Offers Lump Sum Payouts to Retirees
In light of the recent economic downturn I have heard that Social Security offers a lump-sum payment to new retirees who need some extra cash. I have not yet filed for my retirement benefits and would like to investigate this option. What can you tell me?
There is indeed a little-known Social Security claiming strategy that has been around for many years and can provide retirees a lump-sum benefit. However, you need to be past your full retirement age to be eligible and you should be aware that there are significant financial drawbacks of the lump sum.
Here are the basics. Remember that while workers can begin drawing their Social Security retirement benefits anytime between ages 62 and 70, full retirement age is 66 for those born between 1943 and 1954, and it rises in two-month increments to age 67 for those born in 1960 and later. You can find your full retirement age at SSA.gov/pubs/ageincrease.htm.
At full retirement age, you are entitled to 100% of your benefits. But if you claim earlier, your benefits will be reduced by 5% to 6.66% for each year you start payments before your full retirement age. If you delay taking your benefits until beyond your full retirement age, you will get 8% more for each year delayed until age 70.
Lump Sum Option
If you are past full retirement age and have not yet filed for benefits, the Social Security Administration (SSA) offers a retroactive lump-sum payment that is worth six months of benefits.
Here is how it works. Say for example you were planning to delay taking your Social Security benefits past your full retirement age of 66, but you changed your mind at age 66 and six months. You could then claim a lump-sum payment equal to those six months of benefits. For instance, if your full retirement age benefit was $2,500 per month, you would be entitled to a $15,000 lump sum payment.
If you decided at age 66 and three months that you wanted to file retroactively, you would get only three months' worth of benefits in your lump sum. SSA rules prohibit you from claiming benefits that pre-date your full retirement age.
The downside to this strategy is that once you accept a lump-sum payment, you will lose the delayed retirement credits you have accrued, and your future monthly retirement benefit will be reduced to reflect the amount you already received. It will also affect your future survivor benefit to your spouse or other eligible family members after you pass away.
You also need to consider the tax impact of a lump sum payment. Depending on your income, Social Security benefits may be taxable and a lump-sum payment could boost the amount of benefits that are taxed and bump you into a higher tax bracket.
The federal government taxes up to 50% of Social Security benefits at ordinary income tax rates if your combined income – defined as adjusted gross income plus nontaxable interest income plus half of your Social Security benefits – exceeds $25,000. Up to 85% of benefits are taxable if combined income exceeds $34,000. For married couples, the comparable income thresholds for taxing benefits are $32,000 and $44,000.
To help you calculate this, see IRS Publication 915 "Social Security and Equivalent Railroad Retirement Benefits" at IRS.gov/pub/irs-pdf/p915.pdf or call 800-829-3676 and ask them to mail you a copy.
In addition, if the lump-sum payment of retroactive Social Security benefits boosts your yearly income beyond the $85,000 level, it will increase your future Medicare premiums too. See Medicare.gov/Pubs/pdf/11579-medicare-costs.pdf for details.
Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living" book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.
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