For most Americans, deciding when to start their Social Security retirement benefits is daunting. It is one of many decisions that need to be coordinated in order to have confidence in their retirement plans. Yet, this one decision can be deceptively complex as many are not aware of all of the options available to them. One of the lesser known options that many are surprised to hear about is retroactive Social Security Retirement Benefits.
Social Security – General Overview
Social Security Retirement Benefit Payments are paid out monthly. They are calculated based on lifetime earnings and the age at which benefits payments begin. Generally, the earlier you claim your benefits, the smaller the monthly check will be. Claiming benefits later will give you a larger monthly payment, however, you lose the monthly checks you could have received while you waited.
The decision of when to start depends on your individual circumstances and needs. Many factors need to be considered including: the timing of income from pensions, retirement accounts and other investments; your health history; family history of life expectancy; survivor benefits; just to name a few.
Social Security was never intended to be a retiree’s sole source of income and generally does not completely replace pre-retirement income. The Social Security Administration suggests that the monthly benefit amount can be estimated as a percentage of a worker’s pre-retirement income.
If beginning benefits at age 67, this percentage can range from as low as 27% for high earners, 40% for medium earners, to 75% for very low earners. Starting benefits before age 67 reduces these percentages and delaying beyond age 67 increases them.
The Retroactive Benefit Option is enticing to some because it can provide a relatively large lump sum payment. Invoking this option entitles you to receive missed monthly benefits retroactively for as far back as six months prior to filing your application with the Social Security Administration. These retroactive benefits are paid as a single lump sum payment.
Of course, there are a couple of catches.
The first is that you have to have reached full retirement age in order to ask for retroactive benefits. The second is that available retroactive benefits are only available back to the month in which you reached your full retirement age, with a maximum of six months.
An Example of Social Security Retroactive Benefits
For example, if your full retirement age was 66 and you just turned 67, your retroactive benefits are only available back to when you were 66 ½ – six months ago. If you turned 66 three months ago, your available retroactive benefits only go back three months, to the month that you reached your full retirement age of 66.
The last catch is that while you do get a lump sum payment for the Retroactive Benefits, your monthly benefit amount is in effect reduced for the remainder of your life. Because retirement benefit payment amounts are increased for every month that you delay receiving them, the benefit payment amount you would have received at the beginning of the retroactive period is less than what the amount you are eligible to start receiving now.
If you elect to utilize the retroactive benefits, you do receive the lump sum of the payments you missed during that period AND you start receiving the monthly benefit payment amount that you were eligible for on the retroactive date.
For example, say a worker is eligible to receive a $1,800 monthly benefit at full retirement age and they wait to file until six months after their full retirement age. The delayed retirement credits earned over that six months amount to a 4% higher payment of $1,872 – a $72 per month difference. If they decide to start receiving regular retirement benefit payments, the monthly benefit of $1,872 start now and continues for the remainder of their life.
Alternatively, they could file for retroactive benefits back the full six months to when they reached full retirement age. They would receive a lump sum payment of $10,800 (the missed six payments of $1,800) and then begin receiving the monthly benefit of $1,800 for the remainder of their life.
Decisions, Decisions, Decisions…
Depending on your individual circumstances, it could make sense to give up the $72 per month difference for the remainder of your life to get a $10,800 lump sum now. The scenario of being diagnosed with a terminal illness that will drastically shorten your life expectancy is one that comes to mind. You would need to consider that your reduced monthly benefit would also reduce survivor benefits upon your passing and how that may affect those left behind.
Another scenario might include carrying high interest credit card debt. Once again, there would be other factors to consider. The point is that for some it will make sense to file for Retroactive Benefits and for others it will not. Everyone’s situation is unique, especially when it comes to Social Security Retirement Benefit Options.
It is important that you know what options are available to you as well as the pros and cons of those options. When it comes to retirement planning, Social Security is just one of the many decisions that need to be made and each of those decisions can be fairly complex, both financially and emotionally. For those who would like some unbiased professional help, my financial planning service includes retirement and tax planning services that encompass integrating the complex Social Security claiming options into a comprehensive retirement income plan.
If help understanding the Social Security claiming options available to you and how Retroactive Benefits may fit best into your overall financial picture is of interest to you, click here to schedule a time to talk.