Is claiming retroactive Social Security benefits a good idea?

As you approach retirement and start considering your Social Security options, one possible course of action is claiming retroactive Social Security benefits. This provision allows qualified beneficiaries to receive up to six months of benefits in a lump sum if they’re past full retirement age (FRA).

While this strategy can boost your retirement income, it’s also important to understand how it can impact your long-term benefits.

To help you with your decision, InvestmentNews explains in this guide how retroactive Social Security benefits work. We will also discuss the eligibility requirements and explore whether taking retroactive payments is a sound financial move for you. Read on and find out if this Social Security strategy aligns with your retirement goals.

How do retroactive Social Security benefits work?

If you delay receiving retirement benefits beyond your FRA, you have the option to file for what the Social Security Administration (SSA) calls a “retroactive claim.” This comprises a lump-sum payment that covers up to six months’ worth of Social Security benefits. 

To get the maximum amount, you must be six months past your full retirement age. If you exceeded FRA for just five months, you would receive five months of retroactive Social Security benefits, and so on.

Per SSA’s rules, your benefits grow 0.66% for each month past full retirement age until you reach 70 years old. If you claim Social Security six months after FRA, you would have accumulated an additional 4% in monthly payments.

Let’s say your monthly benefit at normal retirement age is $2,500. If you postpone getting retirement benefits for six months after FRA, your payments go up to $2,600 by earning delayed retirement credits.

If you opt for a retroactive payment, the SSA will write you a check worth $2,500 per month, for a total of $15,000. This can be a very tempting amount for most people – but there’s a caveat.

How do retroactive payments affect Social Security benefits?

When you file for retirement past FRA and choose to receive retroactive Social Security benefits, your filing date gets pushed back. This means that you also lose the retirement credits you have earned, permanently reducing your monthly retirement benefits.

So, instead of having a monthly payout of $2,600 for the rest of your life, it will drop back to $2,500. You can break even at around 15 years, although this doesn’t factor in the tax implications of receiving a lump-sum payment and any cost-of-living adjustments (COLA).

And because your personal retirement benefit is reduced, the spousal and survivor benefits linked to it decrease permanently as well.

Gain a deeper understanding of how Social Security benefits work in this guide.

How are retroactive payments determined?

There are three factors in play when determining how much retroactive Social Security benefits you can claim:

• date you became eligible for the benefit: how many months past full retirement age are you
• date you filed your application: how many months have passed since you became eligible for retroactive payments before you applied
• type of benefits you’re eligible for: retroactive payments can be accessed for personal retirement, spousal, survivor, and disability benefits

Who is eligible for retroactive Social Security benefits?

Generally, only people who claim retirement benefits after their full retirement age qualify for retroactive payments. The maximum period of retroactivity is six months, beginning no sooner than FRA. These rules also apply to Social Security spousal benefits.

The requirements, however, are different for widows and widowers. Retroactive benefits may be available for surviving spouses and ex-spouses if their deceased partner has claimed the retirement benefits before reaching full retirement age. They must also be married for at least 10 years to qualify. 

Disabled widows and widowers, meanwhile, can receive up to 12 months of retroactive payouts if they claim survivor benefits before turning 61. They are eligible to file for survivor benefits as early as age 50.

Widows and widowers who haven’t reached FRA and claimed survivor benefits within a month of their spouse’s death can collect a month of retroactive payment. This amount serves as a continuation of the benefits of the surviving spouse since any payouts made during the month the primary beneficiary died must be returned to the SSA.

Learn more about how Social Security survivor benefits work in this guide.

What factors should you consider when deciding whether to claim retroactive benefits?

Deciding whether to claim retroactive Social Security benefits isn’t a one-size-fits-all choice. There are several factors you need to consider to see if this strategy fits your retirement goals, including:

• Impact on monthly benefits: By claiming retroactive benefits, you lose the delayed retirement credits you’ve earned permanently reducing your monthly payout. This amount you’ve lost adds up overtime although you may have a chance to break even if you live long enough.
• Health and life expectancy: If you’re in good health and expect to live longer, the reduced monthly payments may not be worth the trade-off. Conversely, if you have health concerns or a shorter life expectancy, the immediate cash infusion may provide more value.
• Current financial needs: Retroactive Social Security benefits can provide a quick financial boost, which can help if you incur unexpected expenses or need to pay down debt. But if you’re financially stable, the lump sum may not outweigh the downside of reduced monthly payments in the long term.
• Tax implications: Receiving a lump sum benefit can push you into a higher tax bracket, increasing your overall tax liability for the year. This can diminish the financial advantage of getting retroactive payments.
• Effect on other Social Security benefits: Lower monthly payouts extend to the benefits your spouse will receive, including spousal and survivor benefits.

What are the pros and cons of claiming retroactive Social Security benefits?

Filing for retroactive Social Security benefits can have a huge impact on your retirement income. While the chance to claim up to six months’ lump sum of missed benefits may sound appealing, it’s important to weigh the benefits and drawbacks before deciding.

Here are some of the potential pros and cons of taking out retroactive payments:

Pros of claiming retroactive benefits

Immediate boost to retirement income

One of the most attractive elements of retroactive Social Security benefits is the immediate cash boost you receive. This lump sum can be particularly beneficial if you experience unexpected emergencies, need to pay off debts, or just want a financial cushion.

For those who have delayed receiving benefits but found themselves in need of cash, retroactive payouts can provide quick access to funds.

Flexibility in managing retirement finances

Retroactive benefits give you more flexibility in your retirement planning. By receiving a lump sum, you can address immediate financial needs – including medical bills and home repairs – without dipping into your other retirement savings. This strategy can also help if you plan on making large purchases but don’t want to sell investments or deplete other assets.

Extra layer of financial security

If you feel uneasy about your current financial situation, getting retroactive Social Security benefits may provide you with a sense of security. This one-time payment can bolster your emergency funds. You can even use it for discretionary spending such as travel and leisure. This sense of freedom allows you to enjoy your retirement without worrying about short-term cash flow.

Cons of claiming retroactive benefits

Permanent reduction in monthly benefits

The biggest drawback of filing for retroactive Social Security benefits is the permanent reduction in your future monthly payments. You forfeit up to six months of delayed retirement credits, which lowers your benefit amount going forward. This reduction can be worth thousands of dollars in lost benefits over the long term, especially if you live well beyond your life expectancy.

Increased tax liability

Receiving a lump-sum payment may push you into a higher tax bracket. This means you could owe more in taxes than expected. This extra tax hit could easily eat into the financial gains you thought you were getting.

Impact on other Social Security benefits

Retroactive benefits don’t just impact your monthly retirement payouts. They can also affect the benefits your spouse receives. Lower monthly payments mean smaller spousal and survivor benefits. This can leave your spouse financially vulnerable down the road, especially if they are relying mostly on Social Security for their retirement income.

Claiming retroactive Social Security benefits can be an effective tool to meet immediate financial needs. This strategy, however, carries long-term implications that may not be favorable for everyone. That’s why it’s important that you weigh the pros and cons carefully and seek the help of an experienced financial adviser to ensure that your decision aligns with your retirement goals.

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