Chris Stein, CFP®
Most people know you can apply for your Social Security benefits as early as age 62. Most people also know if you do claim early you will be permanently locked into a lower lifetime benefit than had you waited until your Full Retirement Age (FRA) before claiming your retirement benefits. However, what most people don’t know is that in addition to permanently lowering your lifetime benefits, claiming early also exempts you from taking advantage of many claiming strategies available only to those who wait until their FRA or later before filing for their Social Security retirement benefits.
One such strategy available only to those who wait until after reaching their FRA to file for retirement benefits is Retroactive Benefits.
Clear-cut Claiming Strategy
One of the most clear-cut of all claiming strategies, Retroactive Benefits allows a person to elect to receive up to six months of delayed benefits as a lump-sum payment. When electing a Retroactive Benefit your monthly Social Security retirement benefits will be reduced to account for the lump-sum payment. The easiest way to understand the Retroactive Benefits strategy is to look at a hypothetical example:
Let’s pretend a man has a FRA of 66. He chose not to claim at that time and instead delayed claiming his benefit until age 68. His retirement benefit would be increased to account for two years of Delayed Earnings Credits. Each year he delayed his claim past his FRA increased his benefit by 8% per year. By waiting two years to claim his benefit, he increased his Social Security benefit by 16%. What does this look like as a mathematical example? Let’s say his FRA (age 66) benefit was $1,000 per month. By delaying his benefits for two years past his FRA he is eligible for 16% in Delayed Earnings Credits (8% x 2). Therefore, he could file for benefits at age 68 and receive $1,160 in monthly benefits.
Social Security Back Pay?
However, another option he could consider is to file for Retroactive Benefits (which work like back pay) in addition to claiming his retirement benefits. If the man chooses this option, the SSA will pay him up to six months of his delayed Social Security retirement benefits as a lump-sum payment while adjusting his future retirement benefits accordingly.
What does this look like as a mathematical example? Let’s use our same man as described above. Remember, he was eligible for $1,000 of monthly benefits at age 66 but delayed them for two years, increasing his monthly benefit to $1,160. Under the Retroactive Benefits strategy he would elect to receive his maximum six months retroactive benefits in a lump sum. Social Security will then readjust his future monthly benefit as if he retired six months earlier than age 68. In this example, that means Social Security treats him as if he actually claimed benefits at 67½. Therefore, instead of two years of 8% Delayed Earnings Credits, he is only eligible for 1.5 years of Delayed Earnings Credits, or 12% greater monthly benefits. (8% x 1.5) This makes his monthly benefit $1,120, forty dollars less than the $1,160 in the example above. However, Social Security still owes him a lump-sum check for his six months of Retroactive Benefits! So they will take his age 67 ½ benefit of $1,120 per month, multiply it by 6, and cut him a lump-sum check for $6,720!
Is It Worth It?
Is it worth it for him to claim his lump-sum Retroactive Benefit? That’s a judgment call. He will receive $40 less per month, but excluding any possible Cost of Living Adjustments, it will take 168 months, or 14 years, to recoup the $6,720 Social Security will pay him as a lump sum.
Remember, Retroactive Benefits are only available to someone filing for retirement benefits after reaching their FRA. In addition there are advantages and disadvantages to these and other claiming strategies. To learn more about how Retroactive Benefits work, please use the play button below to listen to our audio post.
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