Many federal employees will be retiring within the next few years and starting to consider their Social Security options. In particular, when and at what age to start receiving their Social Security retirement benefit. They can claim their benefits starting as early as age 62. But starting to receive a Social Security retirement benefit before one’s full retirement age (FRA, age 66 to 67 depending on the year an individual was born) will result in a permanent reduction in the monthly retirement benefit.
On the other hand, delaying the start of one’s monthly Social Security past FRA will result in a permanent increase in a monthly benefit. For every month past FRA that Social Security monthly benefits are postponed, there will be a permanent monthly increase of 0.67 percent until the month the individual is age 70.
For individuals who delay the starting date for receiving their Social Security monthly retirement benefit past their FRA, there is another option. This option is claiming retroactive Social Security benefits. This allows qualified Social Security beneficiaries to receive up to six months of monthly benefits in a lump-sum payment. While this option can boost a beneficiary’s retirement income in the short-term, it can impact the beneficiary’s long-term Social Security retirement benefits.
This column discusses the advantages and disadvantages of claiming retroactive Social Security benefits.
How do retroactive Social Security retirement benefits work?
If an individual delays receipt of his or her Social Security benefit past his or her FRA, then the individual has the option to file for what the Social Security Administration (SSA) calls a “retroactive claim.” The claim consists of a lump sum payment that covers up to six months’ worth of Social Security retirement benefits.
In order to receive the maximum lump-sum payment, a Social Security beneficiary must be six months past their FRA. A beneficiary who is five months past their FRA and files a retroactive claim will receive five months of retroactive Social Security monthly benefits.
Per SSA rules, a Social Security beneficiary’s benefits grow 0.67 percent for each month past full retirement until the beneficiary reaches age 70. If a beneficiary claims his or her benefit six months after reaching his or her FRA, the beneficiary would have accumulated an additional four percent in monthly payments.
The following example illustrates:
Francine was born March 15, 1958. Her full retirement age (FRA) is 66 years and 8 months. She reached her FRA on November 15, 2024. According to Francine’s Social Security statement, her FRA monthly benefit amount is $2,000 per month. If she postpones the start of her retirement by 6 months to May 15, 2025, her monthly benefit will increase by four percent to $2,080.
If Francine opts for a retroactive payment, the SSA will send Francine a check for $12,000 – 6 months retroactive payment of $2,000 per month. While this $12,000 lump-sum payment sounds very tempting for Francine, there is a caveat.
How do retroactive payments affect Social Security benefits?
When an individual files for his or her Social Security retirement benefit past FRA and chooses to receive retroactive Social Security benefits, the individual’s filing date gets pushed back. This means that the individual will also lose the retirement credits he or she has earned, thereby permanently reducing his or her monthly retirement benefits Returning to the previous example:
In May 2025, Francine elects to receive 6 months of retroactive monthly Social Security retirement benefits. This means going back to November 2024 with a monthly payment of $2,000 for November 2024 until April 2025, inclusive, or $12,000. But starting with her May 2025 monthly payment, the monthly payment will be equal to $2,000 and not $2,080.
How long will it take Fracine to “break ever”? Answer: Francine’s monthly payment is reduced by $80 ($2,080 less $2,000). Francine received a lump-sum retroactive payment of $12,000.
$12,000 divided by $80/month equals 150 months, or 12 years and 6 months.
In other words, if Francine dies within 12 years and 6 months of receiving her lump-sum payment, she made the right decision to receive a lump-sum benefit payment. This does not factor in the tax implications of receiving a lump-sum payment and any cost-of-living (COLAs) adjustments.
Eligibility for retroactive Social Security benefits
In general, only individuals who claim their Social Security monthly retirement benefits after reaching their FRA qualify for a retroactive lump-sum payment. The maximum period of retroactivity is six months, beginning no sooner than FRA. These rules also apply to Social Security spousal benefits.
How are retroactive payments determined?
Three factors come into play when determining the amount of an individual’s lump-sum retroactive payment:
1. The date an individual becomes eligible for the benefit.
2. The date the individual filed the application for the retroactive payment. How many months have passed since the individual became eligible for the retroactive payment before he or she applied.
3. Type of benefits the individual is eligible for. A retroactive payment can be accessed for personal retirement, spousal, survivor or a disability benefit.
Factors an individual should consider when deciding whether to claim retroactive benefits
There are several factors that an individual should consider in order to determine if this strategy fits the individual’s retirement goals. These factors are:
1. Impact on monthly benefits. By claiming retroactive benefits, an individual loses the delayed retirement credits (0.67 percent per month increase in benefit) he or she earned. The amount of the monthly benefit lost adds up overtime.
2. Health and life expectancy. If an individual is in good health and expects to live longer, the reduced monthly payments may not be worth the trade-off. Conversely, if an individual has serious health concerns and does not expect to live that long (expects to die within five to 10 years), then the immediate lump-sum cash payment may be beneficial.
3. Current financial needs. A retroactive lump-sum payment can provide an immediate financial boost. This can be helpful if an individual incurs unexpected expenses or needs to pay down debt. But those individuals who are financially stable should realize that the lump-sum payments may not outweigh the downside of the reduced monthly retirement benefit in the long-term.
4. Tax implications. An individual’s receipt of a retroactive lump-sum payment could increase the individual’s overall tax liability for the year of receipt. The lump-sum payment could also increase the individuals Medicare Part B and Medicare Part D monthly premiums two years into the future due to “IRMAA.”
5. Effect on other (family) Social Security benefits. Lower monthly payments due to the receipt of a retroactive lump-sum payment will result in lowering family monthly benefits including spousal, children and survivor benefits.
