Lump-sum

Reading Time: 3 minutes So, you are about to start taking Social Security, and you set up a call with a Social Security agent. While on the phone, they tell you about a special option to receive up to six months of benefits in a lump sum when initiating Social Security retirement benefits. You look over at your spouse who shrugs, and you tell the agent, “Yes. We’ll take a lump sum amount.” Little do you realize, you may have rushed the decision and you didn’t understand the tradeoffs in taking this lump sum. This blog is intended to educate you in understanding the tradeoffs so you can be more an Intelligent Investor and make a wise decision.

Social Security Lump Sum Benefit History

The lump sum benefit option isn’t new and has been available when claiming retirement benefits at your full retirement age (FRA) or later. This is usually between the ages of 66 and 70. Social Security representatives are required to fully explain this choice to eligible applicants, whether they ask about it or not, and since it is offered last minute, a knee-jerk reaction can make the applicant decide to take the offer—not fully realizing what they have done until hanging up the phone. The representative may even try and persuade the applicant to take the lump sum by saying things like, “Most people take it.”

The Way the Lump Sum Works

Once you’ve hit FRA (age 66 for those born in 1943-1954, and over age 66 on a sliding scale for those born after 1954), the option to take a lump sum is available. You can choose to receive a lump sum of up to six months of benefits. You’ll get to start your Social Security retirement benefits with a nice big bonus payment. Sounds pretty good, doesn’t it?

The Cost of Taking the Lump Sum of Social Security Benefits

First, the amount of your monthly benefit going forward is reduced. Let’s walk through an example: John Smith contacts Social Security and says he wants to start taking Social Security benefits when he hits age 70, receiving the maximum allowable benefit. Under his earnings history, he’s due $4,000 per month. After hearing the representative explain the lump-sum option, he chooses it and receives a lump sum of around $23,040 (six times the monthly benefit he would have received at age 69 ½). But taking the lump sum option moves his official beginning age for benefits back to 69 ½ instead of 70, and the monthly benefits he’ll begin receiving will be based on that age. He’ll receive $3,840 per month, which is 4% less than his maximum benefits at age 70. (Remember, by delaying benefits after FRA, your benefits increase 8% annually through age 70.)

What Should You Do?

Well, like most financial planning, it depends on several factors. If John Smith decides to use the lump sum to pay off some high interest-bearing loan, it may make sense. However, if John has been waiting until age 70 to start taking benefits, it shows that he is disciplined and likely doesn’t have much debt. If he invests the lump sum well, he could end up with more money than if he had taken the higher monthly benefit. If John is married and is the higher-earning spouse, it may make more sense to decline the lump-sum benefit in order to maximize his monthly benefit so that whichever spouse survives has the highest possible monthly benefit for life. The right choice also depends on your and your spouse’s (if you are married) longevity. If you are single and suddenly diagnosed with a terminal illness you may want to 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. If you are married and facing a terminal illness, then the decision to take the Social Security lump sum benefit becomes a bit tougher to analyze. A higher-earning spouse faced with a suddenly shortened life expectancy may want to reject the lump sum. The reason is 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 declining the lump sum.

Let Us Help You with Your Social Security Benefit Questions and Planning

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