Think Twice Before Taking a Retro SSI Benefit

By Chris Daunhauer

A client reached out to me recently seeking guidance on a choice she did not know she would have to make – “I’ve finally begun the process of claiming my Social Security” she said.  “Should I take the retroactive ‘bonus’ payment that’s being offered to me, or should I hold out for my true age-70 monthly benefit?”

“Good question,” I responded.  “And I’m glad you called me.”

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First, some background…  The income-in-retirement plan that we helped Ms. Smith develop for herself several years ago when she became a TrustWell client included her waiting until age 70 to begin drawing Social Security.  She’s healthy and fit and longevity runs in her family.  She chose to wait because she wants to receive the highest possible monthly benefit – a lifetime benefit, BTW; one guaranteed by the US Government and indexed upward for inflation in most years.

Ms. Smith has been patiently following her plan – she’s waited till this year (and her upcoming 70^th birthday) to begin her benefit.  She’s been retired for a while now and she’s been living off of her bank savings and her IRA while waiting.  It’s not been easy, taking money from her IRA while leaving her Social Security benefit untouched, but she’s stuck with it.

When Ms. Smith finally contacted the Social Security Administration to start the paperwork for her benefit, the benefits counselor she spoke with raised the option of her taking a special one-time retroactive payout of 6-months’ worth of benefit (about $17,000 based on Ms. Smith’s earnings history) in exchange for a slightly reduced monthly benefit going forward.  “This is something many people choose” the counselor gushed.  “Think of it as a reward for waiting!”

But it’s not really a reward.  Because it’s not extra money on top of her full age 70 benefit amount.  It’s more like a “loan” that must be paid back via a reduced benefit every month of every year for the rest of her life.

Here’s a few rules regarding retro payments from Social Security:

• Retro payments are available only to people who have waited until after their FRA (their full retirement age, based on their birthday).  Retro payments are not allowed before one’s FRA.
• The maximum amount of retro payment is six months’ worth of one’s benefit.  You can request fewer than six months of retro payments but not more than six months.
• Any lump sum retro payments will be regular income subject to income taxes, just like regular monthly Social Security income.
• These retro rules are specific to Social Security retirement benefits.  Social Security Disability also offers some retro payment options, but the rules for those are different.
• Retro payments are not scams, and they are not loopholes in the law.  They are not a free lunch, either, and they are not a reward for waiting.  They’re just an option, and that option comes at a cost. 

The “cost” of the option is paid every month thereafter.  Because your SSI benefit grows by about 8% every year that you don’t take it (up until age 70 when it stops growing), the cost of pre-dating one’s application by six months to get this so-called “reward” is a 4% reduction in every monthly payment for the rest of your life.  And, in some cases, for the life of your surviving spouse.

After some conversation with me, and some further thought and research on her own, Ms. Smith decided to stick with her original plan.  She chose to forego the retroactive bonus payment and instead take her full age-70 monthly benefit.  “I could have taken my benefit at age 69 ½” she said.  But waiting seemed smart six months ago, and it still seems smart today.”

I told her I agreed with her decision.  Saying no to a retro payment offer is not the right choice for EVERY person, but I think it is the smart choice for her.

Absent some special circumstance, like a recent diagnosis of a life-shortening illness and/or a desperate need for cash, a retroactive lump sum payment upon commencing your monthly Social Security benefit is a poor (but sadly, popular) choice.