Why Taking a Check Now Can Cost You Later

If you’re waiting past your full retirement age to claim Social Security and increase your monthly payment, you’ll be presented (in the office or online) with a tempting option when you finally apply: Would you like a lump sum payment?

Sounds like a signing bonus. Depending on the amount of your benefit, the government can write you a check for $10,000, $15,000 or $20,000 right away. For many retirees, seeing a five-figure deposit in their bank account feels like a victory.

But this money is not a bonus. It’s a trade-off – and one that often works for the government, not yourself.

Taking that amount permanently reduces your monthly paycheck for the rest of your life. If you live a long, healthy life, that quick buck can cost you tens of thousands of dollars in lost earnings.

Here’s the math behind the offer so you can decide if the cash up front is worth the long cut.

How does the sum of money work

The Social Security Administration (SSA) allows you to claim benefits retroactively, but there are strict limits. You can only claim retroactive benefits once you have reached your full retirement age (FRA).

The maximum retroactive period is six months.

If you choose this option, the SSA actually turns back your claim. If you apply for benefits today at age 70 but request six months’ worth of payments, the SSA treats your application as if you had applied at age 69.5.

They will pay you for those six months of missed checks in a lump sum. However, because the official application date is now six months earlier, your future monthly payments are recalculated based on that age.

(Navigating agency rules can be tricky, especially with recent service shifts. See “Public Safety Is Changing How We Handle Your Case — Why Experts Are Concerned.”

The cost: losing your delayed retirement credits

The reason your paycheck shrinks is the loss of delayed retirement credits.

Once you’re past your full retirement age (usually between 66 and 67), your benefit increases by 8% for each year you wait to apply, until you reach age 70. That comes down to about 0.67% per month.

If you accept a six-month lump sum refund, you lose the delayed retirement credits you earned during those six months.

• Figure: 6 months x 0.67% growth = 4% permanent discount.

By taking the cash, you agree to reduce your monthly income by 4% for life. This may not sound like much, but over 20 or 30 years of retirement, the difference adds up quickly.

Running the numbers

Let’s look at a real-world scenario to see how the math plays out.

Imagine you are applying for Social Security at age 70. After waiting so long, your monthly profit has grown to $3,000.

You decide to take a total of six months back.

• Cutting: Your statutory claim date is reset to age 69.5. Because the reduction is based on your primary insurance amount (not your enhanced age 70 check), your benefit drops to about $2,903.
• Money: You get a check for about $17,420 ($2,903 x 6 months).
• New check: Your monthly payment drops from $3,000 to $2,903.

You now have $17,420 in the bank, but your monthly income is less than $97.

A point of balance

Is the trade off worth it? That depends on how long you live.

To get the answer, you divide the total by the monthly loss:

• $17,420 (gross) ÷ $97 (monthly loss) = 179.5 months.

That adds up to about 15 years.

If you live to be 85 years old, the government comes out ahead. Every month you live beyond that point, you lose money compared to what you would have if you ignored the lump sum and took a higher monthly check.

If you live to age 90, that “free” amount will have cost you about $6,000 in lost lifetime income.

Making the wrong call in searching for strategies is a common pitfall. See “12 Things That Can Eat Your Social Security Payments.”

When the numbers say yes

Aside from long-term costs, there are certain situations where holding cash makes perfect sense.

• Poor health: If you have a serious illness and don’t expect to live past your early 80s, the break-even odds are in your favor. You are better off enjoying the cash now than waiting for a higher monthly payment that you may not be around to collect.
• High interest debt: If you’re drowning in credit card debt at 20% interest or more, using the cash to clear that balance offers a quick, guaranteed return that beats the 8% growth in Social Security.
• Urgent urgent need: If you are facing foreclosures or unexpected large expenses that cannot be covered in any other way, liquidity suggests longevity.

Don’t forget the widow’s fine

If you are married and earn a lot, this decision involves two lives, not one.

When you pass away, your surviving spouse usually gets to step up to the amount of your benefit if it’s more than theirs. This is known as the survivor benefit.

If you take the sum and permanently reduce your check by 4%, you permanently reduce the survivor benefit your spouse will receive when you are gone. If your spouse is younger or healthier than you, increasing that monthly check is often the best way to protect their financial future.

Consider your own long-term insurance policy

Social Security is one of the few sources of income that is guaranteed for life and adjusted annually to avoid inflation. This makes it an excellent hedge against the risk of living “too long” and reducing your savings.

A $15,000 or $20,000 check is exciting today, but an extra $100 or $200 hitting your bank account every single month for 25 years provides security that’s hard to buy. Unless you have a specific, urgent need to spend money, a higher monthly payment usually provides a better return on investment.