Social Security Can Pay You 6 Months at Once - But There's a Catch Most Retirees Miss

Getting six months of Social Security in one payment might sound like a great deal, especially if you have a big expense coming up or simply want more cash on hand.

If you file after your full retirement age, you may be able to collect several months of benefits at once and get a much larger check right away.

The catch is that taking the lump sum can reduce the monthly benefit you receive from then on, which could eventually cost you more than you received upfront. Understanding that trade-off before accepting the money can help you avoid one of those financial mistakes that follows you throughout retirement.

How the six-month lump sum works

If you file for Social Security after reaching your full retirement age, you can generally ask Social Security to start your benefits up to six months earlier than the date you apply. The benefits from those earlier months are then paid to you at once.

For example, say your full retirement age is 67, and you wait until 67 and six months to file. You could ask Social Security to make your benefits retroactive to age 67, giving you six months of payments in a lump sum.

Note, though, that you can't use this option to move your claim to a month before you reached full retirement age, and six months is the most you can receive retroactively. Waiting a year after your full retirement age, for example, would not let you collect a full year of missed payments.

What do you give up when you take the lump sum?

If Social Security backdates your claim to a month before age 70, you give up the delayed retirement credits you otherwise earned for those same months. Waiting beyond full retirement age normally increases your benefit by about 0.67% per month, or 8% for a full year, so going back six months can reduce your ongoing benefit by about 4%.

Say your benefit at full retirement age is $2,200 a month. Waiting six months to claim would increase it to about $2,288, but taking six months of retroactive benefits would give you roughly $13,200 upfront and bring your monthly benefit back down to about $2,200.

A smaller check today can cost much more over time

Giving up $88 a month may not sound like much at first, but over 10 years it adds up to about $10,560. Over 20 years, the difference grows to roughly $21,120.

In this example, the smaller monthly checks could eventually cost more than the $13,200 lump sum you received upfront. Future COLAs also build on the lower benefit, so each increase would be slightly smaller as well. A 3% COLA, for example, would add $66 to a $2,200 benefit compared with about $69 on $2,288.

The effect on your spouse's future income

If you are married, taking the lump sum can also leave your spouse with a smaller survivor benefit later. A lower monthly benefit for you can mean less income for them if they outlive you.

Using the earlier example, the difference between $2,200 and $2,288 is $88 a month. Over 10 years of survivor benefits, that could add up to about $10,560 less.

The tax bill may be bigger than you expect

A large retroactive payment can also increase how much of your Social Security is taxable for the year, depending on your other income. If it pushes your income high enough, it could also lead to higher Medicare premiums later through IRMAA.

So while the lump sum gives you more cash upfront, part of that money could come with a higher tax bill or Medicare costs later.

The lump sum could leave you with a bigger tax bill

If you expect to collect Social Security for many years, keeping the higher monthly benefit can eventually give you more money overall. The lump sum may be worth considering, though, when getting more cash upfront solves a bigger financial problem.

• You have expensive debt: If a credit card or other high-interest balance is costing you more than you would gain from the higher Social Security check, using the lump sum to pay it down could leave you better off.
• You have a shorter life expectancy: If you do not expect to collect benefits for many years, receiving several months of payments upfront could give you more total income than waiting for the higher monthly benefit to catch up.

Using your own benefit amount to calculate the break-even point can make the choice much easier. SSA's online calculators can help you compare different claiming dates and see how each one could affect the amount you receive each month.

Bottom line

A six-month lump sum can be hard to pass up when the extra cash would come in handy. The trade-off is that you give up some of the delayed retirement credits that would otherwise increase your monthly benefit.

Over time, those extra dollars each month can add up and give you more income to cover expenses or save money in retirement. Which option works out better depends on how long you receive Social Security and how much value the upfront cash has for you.

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