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Social Security Offers Lump Sums? Yes, But Beware

In other words, if you take six months of retroactive benefits in a lump sum payment at age 67 when your full retirement age is 66, your monthly Social Security payments going forward will be calculated as if you started taking payments at age 66 and a half.

"There are many situations where taking the benefits in a lump sum would not be advisable because you are lowering your monthly benefits for the rest of your life," Settle says. "But if you expect a relatively short life expectancy, it makes sense. Giving up the money now and gaining it later assumes that you'll be around later to get it, which might not be the case if you don't expect to live long."

What if I want to invest that lump sum?

You might think that you'll be able to invest the six months of retroactive benefits wisely, and that this makes taking the lump sum payment a sound financial move, even if you don't face a financial emergency or serious health problem.

But Robin Brewton, vice president of client services with Overland Park, Kan.-based Social Security Solutions, said that clients all too often spend the money they plan to invest. She's seen it with clients who take their Social Security benefits before they reach full retirement age and doubts that those who take the lump sum payment are any more likely to invest their sudden bundle of cash.

"They have every intention of investing that money," Brewton says. "They believe that they can earn more in the stock market or by investing it, even though the research proves that you can't do that in today's market. But people start to get those checks and they don't do it. They spend the money. And once you're accustomed to living on those checks, you're not willing to set that money aside for investments."

There are tax implications to consider too. As much as 50 percent of your Social Security benefits are taxable if your total annual provisional income -- which includes your adjusted gross income, tax-exempt interest and one-half of your Social Security benefits -- comes to $25,000 or more if you are single or $32,000 or more if you are married and filing jointly.

Up to 85 percent of your Social Security benefits are taxable if your total provisional income is higher than $34,000 if you're single or $44,000 if you're married and filing jointly.

Taking the lump-sum payment, then, might boost your provisional income enough to cost you at tax time.

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