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By Philip Moeller
January 25, 2016

As the horde of baby boomers reach retirement, more and more are eligible to claim a lump-sum benefit payment from Social Security. The rules are tricky, however. And I’m hearing sad tales from readers who claimed this payment inadvertently, which will end up reducing their lifetime benefits.

I’ll explain how to avoid this mistake, but first you may be wondering how lump-sum claiming works. You can claim a retroactive benefits payment if you file for retirement benefits after you reach full retirement age (FRA), which is 66 today and will eventually rise to 67. So if you file between age 66½ and 70, you can get up to six months of payments in a lump sum.

Sounds good, right? But this payment comes at a cost—you give up future benefit increases. Between your FRA and age 70, your unclaimed benefits rise in value at the rate of 8% a year, thanks to delayed retirement credits. If you file for your retirement benefit at age 70, for example, you will qualify for the highest possible benefit—payments that are 32% higher than your benefit at age 66 and 76% higher than at age 62.

By contrast, if you file at 70 after receiving a six months lump-sum payment, your benefits would be calculated as if you had filed six months earlier—at age of 69½. You will lose out on six months of delayed retirement credits, which reduces your monthly payments by 4% for the rest of your life.

Social Security representative are required under the rules to explain these choices and trade-offs clearly and make sure benefits begin exactly when you intend to start them. But the application forms can be confusing. And sometimes the reps may put down an incorrect benefits start date.

In one case brought to my attention, a claimant visited a Social Security office three months before his 70th birthday—he went in early to make sure he had plenty of time to “get it right.” The opposite happened. A Social Security representative provided him six months of retroactive benefits as of the day he visited the office, which set his filing date back six months to the age of 69 and three months. That mistake reduced his lifetime benefits by 6% a month.

Given the widespread confusion over Social Security benefits, these filing errors may occur more often than people realize. A retired Social Security claims representative, who spoke on the condition he would not be identified, said the staffers’ working assumption is that claimants will want any retroactive payments to which they are entitled.

“Based on my personal experience, when you explain to someone that they can either wait until age 70 and receive $3,000 per month, for example, or receive $2,885 per month and get a lump sum check of $17,310, the vast majority opt for the latter,” the representative said. (Statistics on the volume of retroactive benefits and how they have changed in recent years was “not readily available,” according to a Social Security spokeswoman.)

You may be wondering whether you should grab the lump sum or hold out for higher payments later. The right choice depends on your financial situation and your likely longevity. If you delay your benefit till age 70, and you live until your early to mid-80s, your higher monthly payments will more than make up for the forgone lump sum. That’s why postponing claiming offers the best longevity insurance for the growing numbers of people who live into their late 80s and 90s.

Read next: When It Pays Early to File for Social Security

If you get an unintended lump sum payment, or if your monthly benefit is less than you expected, you can get the problem fixed. Call 1-800-772-1213 (TTY 1-800-325-0778) or contact your local Social Security office. Explain the problem and have copies of your original claim at hand, including specifics on when you want payments to begin.

For those planning to file for benefits, make sure whoever you’re dealing with at Social Security knows exactly when you wish your benefits to start. Take the lump sum if you need to—just be clear about the cost to your future benefits.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at [email protected] or @PhilMoeller on Twitter.

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