By Anne Tergesen | The Wall Street Journal – Mon, Mar 10, 2014 11:58 AM EDT
Little-known Social Security rules allow beneficiaries to receive lump-sum payments that can amount to thousands of dollars. Attractive as this may sound, such payments permanently reduce beneficiaries' monthly benefits and should generally be taken as a last resort.
Two of the ways to qualify for a lump sum are available only to those who start receiving benefits after reaching full retirement age. (That figure is gradually increasing to 67 years. You can find your full retirement age at ssa.gov/pubs/ageincrease.htm .) At full retirement age, an individual is entitled to 100% of his or her benefits. Those who claim earlier receive less, while those who delay get more—roughly 8% more for each year they delay claiming, until age 70.
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Many people who claim benefits after full retirement age can elect a lump-sum payment of up to six months of benefits. (To get a full six months, someone with a full retirement age of 66 would have to delay claiming until at least age 66½.) The downside: Social Security permanently reduces your future monthly benefit.
To see how it works, consider a woman who would be entitled to a $2,784 monthly benefit at age 68. By taking a lump sum, she can pocket $16,008. But her monthly benefit will fall to $2,668—the amount she would have received had she started taking her benefits six months earlier, at 67½, says William Meyer, chief executive of SocialSecuritySolutions.com, a service that identifies Social Security claiming strategies likely to yield the highest amount over a beneficiary's life span. (The $16,008 comes from multiplying the monthly benefit at age 67½ by six months.)
Individuals who file for benefits on (or after) full retirement age and then suspend the payments can qualify for potentially larger lump sums—that cover every cent they suspended taking. A man entitled to claim $3,168 a month at age 70, for example, could opt instead for a lump sum of $115,200 and a monthly benefit thereafter of $2,400, the amount he would have received had he started his benefits at age 66, according to Mr. Meyer.
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Those who take a lump sum may find that it pushes them into a higher tax bracket in the year they receive it and subjects more of their Social Security to income tax, says Russell Settle, partner in SocialSecurityChoices.com, which also evaluates claiming strategies. Moreover, he adds, while "there is no downside" for single individuals to file for and suspend their benefits to preserve the option of taking the largest possible lump sum in the future, for some couples "file and suspend isn't the optimal claiming strategy."
While it sounds morbid, the best candidates for a lump-sum approach are single people who know they don't have long to live. Indeed, if you have a strong reason to believe you won't make it to your 80th birthday, you—or your heirs—are likely to come out ahead with the lump sum, says Mr. Meyer.
For couples, it's important to consider the life expectancy of both spouses. To ensure the survivor has the highest possible income, it often pays for the higher wage earner to delay claiming Social Security benefits until age 70, says Mr. Settle. Even if that person dies before the benefits start, the survivor—who must live on one Social Security check rather than two—will inherit the higher amount.
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If you need emergency cash, consider a partial lump sum, since it will reduce your benefit by less, says Mr. Meyer. First, though, calculate the cumulative benefits you would lose over your lifetime so you understand the trade-off, he adds.