For retirees who wait until after their full retirement age before filing for benefits, a little-known Social Security claiming strategy can potentially offer them a lump sum of up to six-months’ worth of retroactive benefits—which can be a boon for any retiree who might need a sudden injection of cash.
Here’s what you need to know about receiving retroactive Social Security retirement benefits:
Retroactive Benefit Eligibility
The Social Security Administration limits retroactive benefits to beneficiaries who have waited to file for their benefits until after they have reached their full retirement age. If you have already applied for your benefits before reaching that important milestone, then you are not eligible for retroactive benefits.
How Much Can You Receive in a Retroactive Benefit Lump Sum?
Beneficiaries older than full retirement age who have not yet filed for retirement benefits may receive up to a maximum of six months’ worth of missed benefits. In addition, such beneficiaries will start to receive their monthly benefits after receiving the lump sum retroactive benefits.
The maximum of six months’ worth of missed benefits is dependent upon how far you are from your full retirement age. If you wait less than six months after reaching your full retirement age, your lump sum benefit is limited to the number of months you waited.
For instance, if you are four months past your full retirement age and you decide to file for retroactive benefits, the date of your full retirement age acts as the starting point for those “missed benefits.” You will receive a lump sum equal to four months’ worth of benefits.
However, if you are more than six months past your full retirement age when you request your retroactive benefits, you will only receive six months’ worth of missed benefits, even though it has been longer than six months since your full retirement age.
Retroactive Benefits and Delayed Retirement Credits
Social Security beneficiaries who delay filing for retirement benefits until after they have reached their full retirement age receive “delayed retirement credits” for each month they wait to take their benefits. These credits are worth 2/3 of 1% for each month that you delay (or 8% per year), which can help grow your monthly benefit for as long as you wait to file.
When you request retroactive benefits, however, you will erase up to six months’ worth of those delayed retirement credits, meaning your lump sum will be based upon what your monthly benefit would have been six months earlier, and your monthly benefits going forward will be based upon that earlier monthly benefit, without the delayed retirement credits.
For instance, let’s say Sarah and Max are each eligible for a retirement benefit of $2,000 upon reaching their full retirement age. Six months after reaching her full retirement age, Sarah decides to file for retroactive benefits.
During those six months, Sarah had accrued 4% delayed retirement credits, or an additional $80 per month. ($2,000 x 0.04% = $80). However, by applying for retroactive benefits, Sarah erases her delayed retirement credits, and receives a lump sum based upon her monthly benefit of $2,000. This makes her lump sum $12,000 ($2,000 x 6 = $12,000), and her monthly benefit going forward will be $2,000.
Max waits until he is 68 years old (which is two years past his full retirement age of 66) before he decides to apply for retroactive benefits. Since this is so far past his full retirement age, his lump sum and his monthly benefit going forward will be based upon his benefit of $2,000 plus 18 months’ worth of delayed retirement credits, or 12%. (Remember, six months’ worth of his two years of delayed retirement credits are erased by applying for retroactive benefits).
This means that Max’s monthly benefit going forward will be $2,240, and his lump sum will be six times that amount, or $13,440. ($2,240 x 6 = $13,440).
Other Retroactive Benefits
Your retirement benefits are not the only type of Social Security benefits that you can receive as a lump sum of retroactive benefits. Social Security specifies that any beneficiary who is older than retirement age and who has not yet filed for any benefit to which they are entitled may receive retroactive benefits. Such benefits include widow/widower insurance benefits and child disability benefits, both of which cap the retroactive benefit amount at six months, and disability insurance benefits, which have a higher cap of twelve months’ worth of retroactive benefits.
For instance, let’s say Eleanor’s ex-husband died when she was 64. She did not realize that she was eligible for widow’s benefit based upon her ex-husband’s work record until she 68 years old. She could have been collecting a widow’s insurance benefit as of her full retirement age of 66, but has missed out.
All is not lost for Eleanor, however, because she can apply for retroactive widow’s insurance benefits. She will only receive six months’ worth of those benefits, rather than the full two years’ worth of benefits she has not received.
Retroactive Benefits: Another Benefit of Waiting
The option of retroactive benefits can offer retirees another type of insurance: the ability to receive a lump sum when you might need it. This is yet another reason to hold off on taking your Social Security benefits until after reaching your full retirement age. Not only does waiting guarantee that you receive a larger monthly benefit, but you keep the option of accessing retroactive benefits as a lump sum.
Source: ssa.gov
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This information is not intended to be legal or tax advice. The author can provide information, but not advice related to social security benefits. Clients should seek guidance from the Social Security Administration regarding their particular situation. Social Security benefit payout rates can and will change at the sole discretion of the Social Security Administration. For more information, please consult a local Social Security Administration office, or visit www.ssa.gov.
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