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TheStreet Open House

Social Security Offers Lump Sums? Yes, But Beware





If you wait until after your full retirement age to claim your Social Security retirement benefits, there is a little-known rule that could entitle you to a large chunk of cash all at once. This provision enables retirees who meet this requirement to receive up to six months of retroactive benefits in one lump sum.

Sound appealing? While this option may be a great choice for some, there are several things to consider before you go for it -- namely its impact on your future benefits.

How Social Security's lump sum option works

The 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.

Making the call

Russ Settle, founding partner with Social Security Choices in Elkton, Md., says that it makes sense to claim the retroactive payment if you've received bad news about your health or if you face a financial crisis that requires an immediate infusion of cash. But in most other situations, it's a bad move because claiming the retroactive benefits locks you into an earlier "official" retirement date, even if you waited until after your full retirement age to claim your benefits.

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