Many people are surprised when learning retirees who claim Social Security after their full retirement age are eligible for up to six months of retroactive benefits paid in a lump sum.

For each month a person postpones claiming their Social Security benefits beyond full retirement age up to 70, they earn an additional 0.66 percent per month, 8 percent a year, in delayed retirement credits.


So if you’re entitled to $2,000 per month at the full retirement age of 66, you would receive $2,640 per month, a 32 percent increase, if you wait until age 70 to claim benefits, according to an article per InvestmentNews:

“I had a discussion with a 69-year-old client yesterday who will be taking Social Security when he turns 70 in July,” Mr. Perry wrote to me in an email. “He told me about his friend who received a $25,000 lump sum payment from Social Security when he turned 70 a few months ago in exchange for a lower benefit. Is this an option for my client?”

“Yes, the Social Security Administration will pay up to six months of retroactive benefits in a lump sum for benefits claimed after full retirement age,” I responded. “But there are tradeoffs.”

Their actual benefit amount would be even larger as all cost-of-living adjustments, or COLAs, from the time they were eligible for benefits at age 62 until they claimed benefits would be added to their benefit amount. Delayed retirement credits end at age 70, so it makes no sense to delay claiming Social Security beyond that age. Going forward, annual cost-of-living adjustments would be applied to the bigger base amount.

For married couples, having one spouse delay Social Security benefits until age 70 has an added benefit. After the death of the first spouse, the remaining spouse receives the bigger monthly amount as a survivor benefit if it’s larger than their own benefit. At that point, the smaller benefit goes away.

In the above example, the 70-year-old man accepted a lump-sum payment of six months of retroactive payments in lieu of six months of delayed retirement credits for that same period. So his age 70 benefits would be 28% higher than his full retirement age amount, representing three-and-a-half years of delayed retirement credits, rather than 32% higher if he collected the maximum four years of delayed retirement credits. That also means his widow would receive a smaller monthly survivor benefit.

Retroactive benefits cannot be paid for periods before an individual reaches full retirement age. For example, someone who applied for Social Security benefits at age 66 and 3 months could request three months of back benefits paid in a lump sum.

Accepting a lump sum payout may be appropriate for a client who has a specific need or goal for that money, whether it’s to use it as the down payment on a second home, to fund a dream vacation or to pay off debt. But they should be aware that the large Social Security payment will have tax consequences and could affect future Medicare premiums.

A portion of the lump sum and monthly benefits for the remainder of that year would be subject to federal income taxes. And depending on their state of residence, Social Security benefits may also be taxed at the state level.

The federal government taxes up to 85% of Social Security benefits at ordinary income tax rates once combined income, defined as adjusted gross income plus 50% of Social Security benefits, plus any tax-exempt interest from municipal bonds, exceeds certain thresholds.

For an individual, up to 50% of Social Security benefits are taxed once combined income exceeds $25,000, and up to 85% of benefits are taxable once combined income exceeds $34,000. For married couples, the comparable income thresholds for taxing benefits are $32,000 and $44,000.

In addition, the lump-sum payment of retroactive Social Security benefits could boost total income beyond certain threshold levels that could subject future Medicare premiums to high-income surcharges.

Since 2007, Medicare beneficiaries whose income exceeds $85,000 for individuals and $170,000 for married couples have been required to pay an income-related monthly adjustment amount surcharge, known as IRMAA, in addition to their regular monthly Medicare premiums. The IRMAA surcharges apply to both Medicare Part B, which covers outpatient services and doctors’ fees, and Medicare Part D prescription drug plans.

In 2019, most of Medicare’s 60 million beneficiaries pay the standard premium of $135.50 per month. But about 3 million high-income retirees pay additional monthly surcharges ranging from $54.10 to $325 per month per person for Medicare Part B as well as surcharges on their Medicare Part D prescription drug plans. IRMAA surcharges for 2019 are based on 2017 federal income tax returns.