How Social Security's lump sum option worksThe rule is a bit complicated, but Kia Anderson, a spokesperson for Social Security Administration, illustrates a possible scenario: Say a retiree reached full retirement age in November 2012, but then waited to file an application for Social Security benefits until November 2013. In this example, the retiree might be entitled to retroactive benefits -- paid in a lump sum -- beginning from May 2013, or six months before he or she finally filed for benefits.
Because of the six-month limitation on this rule, the first six months of benefits would effectively be gone for a retiree in this situation. But for those who need a large chunk of cash for an emergency or for those who are in bad health and don't expect to live long, the six months of benefits that are still available may be much appreciated. Still, there is a major drawback to claiming retroactive benefits in a lump sum: It will reduce your ongoing monthly Social Security benefits for the rest of your life. That means that retirees should examine their circumstances before choosing this option, says Anderson.
"It depends on a person's individual situation as to whether they would like to file for retroactive retirement benefits," she says.