When to begin claiming Social Security benefits is one of the most important decisions that you’ll face when it comes to retirement planning. According to a September 2016 Government Accountability Office (GAO) report, Americans don’t always understand how these benefits work.
One example, according to GAO, is the lump-sum payment. Anyone who reaches the Full Retirement Age (FRA) and hasn’t claimed Social Security benefits may receive a lump sum, which is a payment of up to 6 months’ worth of benefits. (FRA is 66, 67 or somewhere in between depending on your birth year.)
The lump-sum benefit can help you to offset unexpected expenses, experts say. However, the trade-off is lower permanent payments.
It works like this, according to Ruthann Driscoll of Northwestern Mutual. Let’s say you decide to begin to receive Social Security benefits at age 66 and 6 months and your monthly benefit is $2,080. If you took a 6-month lump-sum payment, the payment would be for only $12,000, not $12,480, and your monthly benefit thereafter would be $2,000, not $2,080. That’s because Social Security rolls back the time for when you started to receive benefits by the same number of months that you used to calculate the payment. In other words, if you took a 6-month lump-sum payment at age 66 and 6 months, Social Security would act as though you started to receive benefits at age 66.
We’ve noted the importance of delaying Social Security benefits for as long as possible up to the maximum age of 70, so we believe that you should try to avoid taking a lump-sum payment.