With the uncertainty of a presidential transition, people receiving Social Security payments may be wondering what changes would be made to the program under a new Trump government.
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 amount is not an option, the Social Security Administration (SSA) does allow certain recipients to claim a limited quantity of payments.
Lump Sum Social Security Benefit Basics
The first thing to remember is that you must be above the age of full retirement to claim a lump amount from the Social Security Administration. Retirement benefits may 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 collecting benefits before claiming the lump amount. Any recipient who has already requested benefits will be unable to use this option.
The third major point is that the maximum amount of benefits you may claim in one go is six months, and in order to get the whole six months’ worth in a lump sum, you must wait at least six months after reaching full retirement age.
Choosing to obtain Social Security retroactive payments in one single amount might result in a significant payout. For example, with the average monthly payment in 2023 being $1,827, claiming six months of retroactive benefits might result in a lump payout of $10,962. This choice, however, affects future monthly payments 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 payments will be computed as if you had begun at age 67.5, which means you would lose half of the yearly 8% increase, or 4%. If your monthly benefit at age 68 was $2,500, this decrease would permanently drop it to $2,400. In exchange, you would get a lump payment of $14,400, which is equal to six months of the decreased $2,400 payout.
This is significant since each year between your full retirement age and reaching 70 years old allows you to earn 8% more in benefits, up to a total of 24%. Losing that percentage in benefits may be worthwhile for certain people, particularly those with a short life expectancy.
If you do the arithmetic, it would take 144 months or 12 years for your $100 lower monthly benefits to equal the $14,400 lump sum payout, and if you need the money right now or want to invest in other projects, having a large cash inflow would be beneficial.
The advantages of claiming this lump amount are obvious; the immediate availability of the funds in your account enables 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 might offer large returns.
However, there are certain drawbacks to consider, the most significant of which is that your monthly payment will be permanently reduced. Another disadvantage that most individuals overlook is that the lump sum payment could push you into a higher tax bracket for the year, increasing your income tax liability and making the claim less desirable.
The last disadvantage is that if you opt to invest the money (or pay off debt at a lower interest rate) and get less than an 8% return on investment, you would have been better off waiting to claim.
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