How to Get Social Security In a Lump Sum (Without Taking Any Lumps)

When you think of Social Security benefits, you probably imagine a regular stream of income. What you may not realize is that two kinds of claiming strategies can get you a big lump-sum benefit—one that may be worth more than $100,000 to higher-income retirees.

It’s a tempting notion. However, some people should resist the glitter of even this much money lest they wind up leaving even more benefits dollars on the table. Here’s a quick look at the pros and cons of these strategies:

In the first scenario, you can claim a retroactive payment from Social Security if you have reached full retirement age (FRA) and did not file for benefits at that time. (FRA is 66 for people born between 1943 and 1954, rising in two-month increments to 67 for those born in 1960 and later.) The maximum retroactive lump-sum payment is six months’ of benefits.

Say you were going to defer benefits past your FRA at age 66, then you had to change your mind at 66 and six months. You could then claim a lump-sum payment equal to those six months of benefits. If you decided at age 66 and four months that you wanted to file retroactively, you’d get only four months’ worth of benefits in your lump sum—rules prohibit you from claiming benefits that pre-date your FRA. (For some retroactive claims involving people with disabilities and their family members, the lump-sum payment will extend to 12 months of benefits.)

This brings us to the second claiming opportunity: a lump-sum reinstatement of benefits. It involves more money but it could cost you more too. Again, this option is only available to people who’ve reached their FRAs. Let’s say your FRA is 66, and you decided to defer filing until you turn 70, when you can claim maximum benefits. By delaying, your benefit increases 8% each year (plus any cost-of-living adjustments) until you turn 70. That means your benefits at 70 would be 32% higher than at 66 after inflation.

To get this higher benefit you could simply do nothing at age 66, and your benefits would begin rising each month due to the delayed retirement credits.

A more flexible approach is to tell the agency that you want to “file and suspend” your benefits. This way, your benefits will still rise each month until you begin taking them. But it creates a nice insurance policy for you. At any time after turning 66 and before your benefits begin automatically at 70, you can ask Social Security to issue you a lump-sum payment for all the benefits you would have received had you begun taking them at age 66.

Without the file-and-suspend in place, if you had an emergency that required you to start benefits, you could not get all the foregone payments reinstated. The best you could do is file retroactively and get a maximum of six months benefits.

While this might be a great insurance policy, there are three downsides to keep in mind.

1. If you ask for a lump-sum payment, you lose all the delayed retirement credits you’ve accrued. That’s because Social Security calculates your benefits from age 66 and will give you a lump sum based on that monthly rate (plus any cost-of-living increases). Your monthly benefit thereafter will be based on a start date of age 66. If your FRA benefit was, say, $1,000 a month, it would have risen to $1,320 in real terms by age 70. You will have forfeited that extra $320 each month.

2. If you ask Social Security to file and suspend your benefit, it will prohibit you from ever being able to collect spousal benefits while deferring your own retirement benefit. To enable such spousal benefits, you must file what’s called a “restricted application.” Unfortunately, you can’t do both.

3. If you wave good-bye to that maximum $1,320 monthly benefit, so will your survivors. Their benefits are tied to yours, so when you do anything to reduce your benefit, it can have a life-long impact on your family.

For this reason, filing and suspending benefits is only a guaranteed slam-dunk for single people with no spouses or children—they don’t need to care about benefits for surviving family members. For married persons and single persons with former spouses and children, a file-and-suspend strategy to preserve access to a lump-sum payment is a tricky decision. Consider talking to a financial adviser before making this move.

Philip Moeller is an expert on retirement, aging and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.