• Chris Stein, CFP®

Beware of Retroactive Benefits

A little issue has come to our attention with regard to the way Social Security offices process your application for benefits once you reach your Full Retirement Age (FRA).  This regulation/rule they follow may jeopardize your plan to increase your monthly benefit by taking advantage of Delayed Retirement Credits.  Most of you know that for every year past your FRA you wait to claim your retirement benefit you will receive an 8% increase in the monthly amount.  These credits for delaying are effective up to age 70 when they no longer reward you for waiting.  Many people who do not need the benefits earlier try to wait to age 70 to maximize their monthly benefit as well as the survivor benefit that would be left to their spouse.  This is where the Social Security office may derail your plans.

Retroactive Benefits is the Default

It turns out that the system defaults to awarding you retroactive benefits.  We have discussed retroactive benefits in detail previously, but in a nut shell Social Security allows you to back-date your application and claim up to 6 months of benefits in a lump sum.  This retroactive claiming is limited to those people who have reached their FRA and the retroactive application can only go back 6 months or back to your FRA month, whichever is less.

Disclaim the Retroactive Benefits

Since the default is to file your claim retroactively you must expressly disclaim these retroactive benefits if you instead want to take full advantage of your Delayed Retirement Credits.  If you claim retroactively it is just as if you had gone into the SS office 6 months ago and started your claim.  This will reduce your monthly benefit by about 4%; every month, year after year, each year until you pass away.  It also permanently reduces the survivor benefit for your spouse; every month, year after year, each year until they pass away.

Understand the Tradeoff

This is where our warning bells sound.  Make sure you understand the tradeoff between the monthly benefit and the lump sum retroactive payment.  You can’t have your cake and eat it, too.  It may make perfect sense to file retroactively, but make sure you are doing it intentionally and not just because that is the default in the SS system.  In the long run it may not be the right path.

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