Advice from many experts today is that people should delay claiming their Social Security benefits for as long as possible, or until age 70, when they have to claim them. But what should retirees do who have delayed taking Social Security even after reaching full retirement age (FRA), and when they make the claim, the government offers them a lump-sum retroactive payment up to six months? Should they take it or not, and what’s the downside, if there is one?
Although this lump sum may be a tempting choice for retirees in financial need, it may not be the right one. The six-month, one-time lump sum offer is only available to those who have reached FRA. The lump sum retroactively resets the benefit amount to the lower benefit of 6 months earlier.
“The answer depends. The main factor is expected longevity. By opting to take the lump-sum option, one rolls back the clock six months for when benefits are calculated. Depending on anticipated longevity (see links in this blog to online calculators) one needs to determine the breakeven point for that to make sense,” he explains. A retroactive lump sum reduces the monthly benefit with a 10- to 12-year catch-up period, so generally it is not prudent if you think you will live another 10-12 years.
If you are married and your spouse is much younger
than you with a lower Social Security benefit amount, you may not want to lock
in a lower social security benefit over both lives.
“However, if you have bills, debt or having trouble making ends meet and the choice is retroactive lump sum or retirement account withdrawal, the retroactive lump sum may be better, even in the long run, because the retroactive lump sum creates less income tax than the retirement account withdrawal. The retirement account withdrawal is taxed dollar-for-dollar, and the retroactive lump sum is taxed at most $0.85 on the dollar, possibly $0.50 on the dollar or maybe even tax-free depending on the family’s other taxable income,”
Taking a lump sum sets the start date back to an earlier age and therefore all future benefit checks will be reduced. However, if one has been diagnosed with a life-shortening disease, taking a lump sum may be the best choice.
According to financial planning analyst C.J. Miller, “It is almost never in the best interest of the client to take the lump sum. The payment eliminates the monthly benefit increase gained by delaying in the first place, which is usually 8% a year. Additionally, taking the lump sum is a taxable event. Many people that elect the lump sum end up paying a higher tax rate and getting less for the benefit than they would have if they had claimed earlier. Most people that delay benefits do it for a reason, and the lump sum eliminates that.”
https://www.thinkadvisor.com/2020/01/10/should-clients-take-a-lump-sum-social-security-payment/
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