With the uncertainty of a presidential transition, those receiving Social Security benefits may be wondering what changes will be made to the program under a new Trump presidency.
One of the options that the president-elect mentioned during his campaign was to eliminate taxes on all Social Security benefits, and because this would significantly accelerate the rate at which the program funds deplete, some are panicking about whether or not they will be able to claim their benefits in full.
While claiming all of your benefits in one lump sum is not an option, the Social Security Administration (SSA) does allow some beneficiaries to claim a small sum of payments.
Lump Sum Social Security Benefit Basics
The first thing to remember is that you must be over the age of full retirement to claim a lump sum from the Social Security Administration. Retirement benefits can be claimed as early as age 62, but lump sum claims must be made after the age of 66 or 67, depending on your date of birth.
The second thing to remember is that you must not have begun receiving benefits before claiming the lump sum. Any beneficiary who has previously requested benefits will be unable to exercise this option.
The third major point is that the maximum amount of benefits you can claim in one go is six months, and in order to receive the full six months’ worth in a lump sum, you must wait at least six months after reaching full retirement age.
Choosing to receive Social Security retroactive benefits in one lump sum can result in a substantial payment. For example, with the average monthly benefit in 2023 being $1,827, claiming six months of retroactive benefits could result in a lump sum of $10,962.
This option, however, reduces future monthly benefits by adjusting your claiming age to reflect an earlier start date. For example, if you claim six months of retroactive benefits at age 68, your benefits will be calculated as if you had started at age 67.5, which means you will lose half of the annual 8% increase, or 4%.
If your monthly benefit at age 68 was $2,500, this reduction would permanently lower it to $2,400. In exchange, you would receive a lump sum of $14,400, which is equal to six months of the reduced $2,400 benefit.
This is significant because each year between your full retirement age and reaching 70 years old allows you to accrue 8% more in benefits, up to a total of 24%. Losing that percentage in benefits may be worthwhile for some people, particularly those with a short life expectancy.
If you do the math, it will take 144 months or 12 years for your $100 lower monthly benefits to equal the $14,400 lump sum payment, and if you need the money right away or want to invest in other ventures, having a large cash inflow would be beneficial.
The benefits of claiming this lump sum are obvious; the immediate availability of the funds in your account allows you to make financial decisions that you would not have been able to make otherwise, such as paying off debts or making riskier investments that could yield high returns.
However, there are some drawbacks to consider, the most significant of which is that your monthly benefit will be permanently reduced. Another disadvantage that most people overlook is that the lump sum payment may place you in a higher tax bracket for the year, increasing your income tax liability and making the claim less appealing.
The final disadvantage is that if you decide to invest the money (or pay off debt at a lower interest rate) and earn less than an 8% return on investment, you would have been better off waiting to claim.