Americans who qualify for Social Security retirement benefits are usually encouraged to wait at least until full retirement age to collect so you can get 100% of the benefits you are due. Ideally, you’ll wait until age 70 so you can get the maximum benefit.
What you might not know is that you can opt for a retroactive, lump-sum payment if you waited until after your full retirement age to apply. For example, it you apply one to five months after you reach FRA, you can get retroactive benefits in a lump sum for that number of months, according to the AARP. If you file six months or more past full retirement age, you can get up to six months in back benefits.
That lump sum rises the further you move past full retirement age. If you wait until age 70, you might be looking at a one-time payment of $30,000 or more.
But there’s a catch. As the AARP pointed out, collecting retroactive benefits might get you an immediate lump sum payment, but it can also cost you over the long run. That’s because you’ll lose the delayed retirement credits (DRCs) you earned, which will permanently reduce your payment by two-thirds of 1% for each back-paid month — or a total of 4% for a six-month retroactive payment.
In a recent column for Newsbreak, author and retirement consultant Marcia Mantell noted that once you reach full retirement age and still haven’t claimed benefits, your monthly payment continues to grow by both annual cost-of-living adjustments (COLAs) and DRCs — a combination she calls a “powerful multiplier effect.”
Mantell used the example of someone born in 1952. They hit full retirement age at 66 years old in 2018 and reached age 70 in 2022. Their initial primary insurance amount (PIA) was set in 2014 when they were 62. The PIA is the benefit you would get if you elect to begin receiving retirement benefits at your “normal” (full) retirement age, according to the Social Security Administration.
Using the actual COLAs since 2014, here is what would happen with and without the six-month retroactive lump-sum payout:
- The maximum monthly benefit at age 70 is about $4,620 a month.
- After the six-month lump-sum offer, the monthly benefit amount is reset and reduced to about $4,280 a month, representing a $340 monthly reduction.
The lump-sum payment would be about $25,700, according to Mantell, founder and president of Mantell Retirement Consulting. But as she noted, giving up $340 in monthly benefits is a “hidden trap.” If you assume a retirement that lasts 25 years, monthly benefits will actually be shorted by $650 per month by the end of retirement, assuming a straight-line 2.5% COLA. The lower your monthly payment, the less impact the annual COLA has.
Social Security agents will often “offer” the lump-sum payment to those who claim benefits after their FRA, Mantell wrote. This might look very inviting by the time you reach age 70, when you might be eligible for a one-time lump-sum payment in the $20,000 to $30,000 range. What you need to keep in mind is that by accepting this deal, your total benefits over time might be less than if you didn’t accept it.
“Monthly payments are significantly reduced when choosing the lump-sum option,” Mantell wrote.