1/8/2014 4:45 PM ET|
Considering a lump sum from Social Security?
Here are the pros and cons of taking a large Social Security payout.
If you wait until after your full retirement age to claim your Social Security retirement benefits, there is a little-known rule that could entitle you to a large chunk of cash all at once. This provision enables retirees who meet this requirement to receive up to six months of retroactive benefits in one lump sum.
Sound appealing? While this option may be a great choice for some, there are several things to consider before you go for it -- namely its impact on your future benefits.
How Social Security's lump sum option works
The rule is a bit complicated, but Kia Anderson, a spokesperson for Social Security Administration, illustrates a possible scenario: Say a retiree reached full retirement age in November 2012, but then waited to file an application for Social Security benefits until November 2013. In this example, the retiree might be entitled to retroactive benefits -- paid in a lump sum -- beginning from May 2013, or six months before he or she finally filed for benefits.
Because of the six-month limitation on this rule, the first six months of benefits would effectively be gone for a retiree in this situation. But for those who need a large chunk of cash for an emergency or for those who are in bad health and don't expect to live long, the six months of benefits that are still available may be much appreciated.
Still, there is a major drawback to claiming retroactive benefits in a lump sum: It will reduce your ongoing monthly Social Security benefits for the rest of your life. That means that retirees should examine their circumstances before choosing this option, says Anderson.
"It depends on a person's individual situation as to whether they would like to file for retroactive retirement benefits," she says.
Making the call
Russ Settle, founding partner with Social Security Choices in Elkton, Md., says that it makes sense to claim the retroactive payment if you've received bad news about your health or if you face a financial crisis that requires an immediate infusion of cash. But in most other situations, it's a bad move because claiming the retroactive benefits locks you into an earlier "official" retirement date, even if you waited until after your full retirement age to claim your benefits.
In other words, if you take six months of retroactive benefits in a lump sum payment at age 67 when your full retirement age is 66, your monthly Social Security payments going forward will be calculated as if you started taking payments at age 66 and a half.
"There are many situations where taking the benefits in a lump sum would not be advisable because you are lowering your monthly benefits for the rest of your life," Settle says. "But if you expect a relatively short life expectancy, it makes sense. Giving up the money now and gaining it later assumes that you'll be around later to get it, which might not be the case if you don't expect to live long."
What if I want to invest that lump sum?
You might think that you'll be able to invest the six months of retroactive benefits wisely, and that this makes taking the lump sum payment a sound financial move, even if you don't face a financial emergency or serious health problem.
But Robin Brewton, vice president of client services with Overland Park, Kan.-based Social Security Solutions, said that clients all too often spend the money they plan to invest. She's seen it with clients who take their Social Security benefits before they reach full retirement age and doubts that those who take the lump sum payment are any more likely to invest their sudden bundle of cash.
There are tax implications to consider too. As much as 50 percent of your Social Security benefits are taxable if your total annual provisional income -- which includes your adjusted gross income, tax-exempt interest and one-half of your Social Security benefits -- comes to $25,000 or more if you are single or $32,000 or more if you are married and filing jointly.
Up to 85 percent of your Social Security benefits are taxable if your total provisional income is higher than $34,000 if you're single or $44,000 if you're married and filing jointly.
Taking the lump-sum payment, then, might boost your provisional income enough to cost you at tax time.
Settle says that for most retirees, taking the lump sum payment instead of the higher monthly payments for life simply doesn't make sense.
"In this low-interest-rate environment, getting any rate of return that would be close to the rate of return that delaying Social Security benefits would offer you is really impossible," he says. "That assumes, of course, that you expect to live long enough to take advantage of those higher monthly benefits."
More from MoneyRates.com:
VIDEO ON MSN MONEY
When I turn 62 , I want to be like "Billy Joe and Bobbie Sue". I'm gonna "Take the Money and Run".
Has everyone forgotten whose Money it is in the first place? It's Mine and Yours. From your
first job to your last - you contributed 7.5% and the company your worked for contributed 7.5%
EACH AND EVERY PAYDAY. According to my latest SSN statement, my contributions total over
$100,000. I'm 63 and getting ready to file and retire. My monthly payments are going to be
around $1600. Now let's say after I receive my first check, I die - my wife will get a $255 payment
and that's it! The Government gets to keep the other 98,000. Doesn't anyone see anything
wrong with that??? Uncle Sam gets to keep that PLUS the Interest. I say - give me ALL of my
money now and I'll worry about me. Privatise SSN?? Damn Right!! SSN was great for my
grandparents and parents, although the most they got was 225 a month - they actually saved.
SSN needs to go bye-bye.
I still remember my first payroll check when I was 16 making $1.60 an hour and saw the earned amount and the net amount. I asked my boss what all of the deductions were for and he said the local tax is for the city to maintain the roads you drive on, police, fire, etc... The state tax was kind of the same thing only it covered things outside my town but within the state. The federal tax was a little bit harder for him to explain but he said it covered everything not paid for by local or state taxes like the military. I wasn't too happy but sort of understood what these taxes were used for. Then I said what is this SOCSEC deduction and my boss said that is for your retirement and you will pay into this with every pay check you receive as long as you work. So I asked him if the government gave it all back to me when I retire and my boss laughed so hard he started coughing and choking.
This is new? And this isn't common knowledge?
Of course you may get paid retroactively. But it will lower your future payments benefit per month. If you begin one year later, then you get a higher benefit.
Simple. But evidently, not simple enough for MSN.
A lot of things can make a tough choice, very easy.
IMHO, don't wait until full retirement age to file for benefits. (but that's just me).
Here's another ridiculous article by MSN's staff to fill space.
What percent of America does this "lump sum payout" effect?
Maybe somewhere below 1/2 of 1 percent?
And who in their right mind is waiting till they are 68 years old to file for their benefit?
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Saving just a single month of expenses may take longer than you think. See how your savings rate affects how quickly you can build a solid emergency fund.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'