Social Security has a quick cash solution

The unemployment news is dire, with 36 million people having filed for unemployment benefits since mid-March. The pandemic has put millions of workers, particularly vulnerable older workers, at double risk: being involuntarily laid off or being forced to go to work, endangering their health.  In 2019, roughly one in five adults age 65 and older were still in the workforce.

While many working seniors may have hoped to delay claiming Social Security to create a bigger future benefit, job losses could prompt some to claim benefits sooner to meet immediate income needs.

Social Security can create a vital lifeline for seniors by providing immediate cash flow and, depending on a client’s age, the possibility of a lump sum payout of up to six months of retroactive benefits. And the client still may be able to earn bigger benefits in the future.

The key is to combine two available Social Security claiming strategies. I credit David Freitag, a financial planning consultant with Mass Mutual, with calling this combo strategy to my attention.

First, individuals who are full retirement age or older when they file for Social Security have the right to request a lump-sum payout of retroactive benefits. The maximum retroactive payment is six months, and it can’t begin before full retirement age.

For example, someone who files for Social Security at 67, a year after reaching their full retirement age of 66, can request a maximum lump-sum payment of six months of benefits. But someone who files at 66 and 3 months could receive just three months of retroactive benefits, beginning from their full retirement age of 66. Individuals who file for benefits before their full retirement age are not eligible for lump-sum retroactive payments.

Second, individuals who are receiving Social Security benefits have a right to suspend those benefits once they reach full retirement age. No repayment is necessary. During the suspension, their benefits will stop and so will the benefits of anyone claiming on their earnings record, such as a spouse or minor child.

The one exception to the suspension rule is a divorced spouse. If a former spouse suspends his or her benefits, it will not affect the benefits of an eligible ex-spouse who is collecting benefits on an ex-spouse’s earnings record. An eligible divorced spouse is defined as someone who was married at least 10 years and is divorced, unmarried and old enough to claim Social Security.

During the suspension period, an individual earns delayed retirement credits of 8% per year up until age 70. Benefits will automatically resume the month you turn 70. Or you can request to reinstate your benefits before then, but you will only earn delayed retirement credits for the months you do not receive benefits between your full retirement age and age 70.

Freitag offers the following hypothetical example of how a combination claiming strategy can create an infusion of cash now while still building a bigger Social Security benefit for the future.

Bob, age 67, is past his full retirement age of 66. Bob has been working and planned to wait to claim his Social Security retirement benefit until age 70, when he could have earned up to 32% more income as a result of four years’ worth of delayed retirement credits. Unfortunately, Bob lost his job during the pandemic and he now needs immediate income.

Step 1. Bob goes to the Social Security Administration website to apply for retirement benefits online. When asked when he wants to start his benefits, Bob requests a start date of six months before the current date. He requests an immediate six-month lump-sum payment of his benefits.

Let’s say Bob was eligible for a retirement benefit of $2,000 a month at his full retirement age of 66. At age 67, his benefits are 8% higher, now worth $2,160 per month. But if Bob requests a lump sum of six months of retroactive benefits, he forfeits a half a year of the delayed retirement credits.

If Bob claims benefits at 67 and requests six months of retroactive benefits, his payment at age 66 and 6 months would be worth 104% of his full retirement age amount or $2,080 per month. He could receive $12,480 in a lump sum ($2,080 x 6 months).

Step 2. Once Bob receive his lump sum check, he can immediately ask for a voluntary suspension of his benefits. By combining these two strategies, Bob has immediate cash now and resumes earning delayed retirement credits.

“Overall, he loses 4% in delayed retirement credits but gains access to cash to pay his mortgage, utility bills, car payments and buy groceries,” Freitag said. “Using this combination strategy could very well provide a lifeline for immediate financial stability and also buys time for the economy to recover and for employment to return to more normal levels.”

[Listen to Mary Beth Franklin's latest Retirement Repair Shop podcast: Investing the right way in a crisis]