Making the most of Social Security is essential, especially if you're in or approaching retirement. The monthly payments will provide you with financial support for the rest of your life.
However, many people find that it's useful to have a larger chunk of cash available right when they retire. Monthly checks are useful, but it's hard to use them for big-ticket items. Fortunately, there's a way for Social Security recipients to ask for and get a lump-sum payment. Before you use this strategy, though, it's important to know what's involved and what you're potentially giving up.
The little-known lump-sum Social Security option
Most people claim their benefits from Social Security simply by asking the government to start mailing monthly checks. That's the only option if you haven't yet reached your full retirement age, which ranges from 66 to 67 for those currently nearing the end of their careers.
However, once you've reached your full retirement age, then you have the option of retroactively asking for back payments on Social Security. You can never make a claim for a lump sum that includes months before you reached full retirement age, but the longer you wait beyond that age, the more months' worth of benefits you can include in that lump sum.
The absolute maximum lump-sum payment that the Social Security Administration will make is six months' worth of benefits. So if your full retirement age is 67, then you'll qualify for the six-month maximum if you request a lump sum any time after you turn 67 1/2.
It's easy to understand how this could be valuable. With the average worker benefit of about $1,500 per month, a lump sum could put $9,000 into your pocket quickly. That's a nice nest egg to start out your retirement.
Why a lump sum might not be right for you
Even though these lump sums are sizable, many people don't ask for them. Most people want to take benefits early, when lump sums aren't available. And even if you wait, you have to give up something in return.
The Social Security Administration treats those who ask for lump sums as if they had applied for Social Security in the month corresponding to the earliest payment that becomes part of the lump sum. In the example above, if you turn 67 1/2 and ask for six months of benefits in a lump sum, the amount of those benefits will get calculated as if you had claimed right at age 67, not 67 1/2. That'd give you six times whatever your regular monthly payment would be, all at once.
By contrast, if you claimed regular benefits at age 67 1/2, your payment amount would get a 4% boost due to delayed retirement credits. So again, using the base $1,500 monthly amount, the trade-off for getting that $9,000 lump sum is that you won't get a larger $1,560 Social Security check -- both now and for the rest of your life.
What's right for you?
There's no right or wrong answer that applies to everyone. For single retirees who don't expect to live long enough for that extra $60 per month in benefits to make a big difference, having $9,000 upfront could be well worth it. For others -- especially those with spouses who will rely on family benefits determined by the working spouse's claiming decision -- giving up the extra monthly money isn't worth a small lump sum right now.
The one thing to understand, though, is that you shouldn't see lump-sum Social Security as a no-cost answer to your financial needs. It comes with a cost that you need to be willing to pay before you take the money and run.