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Understanding Social Security: When should I claim Social Security? The dilemma and the strategy

When you talk to Social Security Administration about filing for your retirement benefit, you may have faced this opportunity: The representative from Social Security suggests that you could receive a lump-sum payment amount equal to the past six months’ worth of benefits, along with starting to receive a monthly payment next month.

What a bonanza!

What happened there? Let’s walk through an example to illustrate. Simon is turning 64, and he’s decided that he’d like to start his Social Security benefit at that age. Simon’s Primary Insurance Amount (or PIA) is $2,000. The PIA is the amount he could receive if he delayed his filing for benefits until his Full Retirement Age (FRA), which is 66 years and 8 months.

Read: Reframe the decision over whether to delay claiming Social Security into ‘reversible’ 6-month choices

Since he’s thinking about starting his benefit at age 64, this is 32 months before his FRA. This means his benefit at 64 will be reduced to $1,644, or 17.78%. This will be a permanent reduction. The only way Simon’s benefit will increase is by the annual COLA, unless Simon goes back to work and earns more money to increase his benefit, or if he suspends his benefit for a few years to collect delay credits (these two strategies are complicated so we won’t go into details at this point).

The helpful SSA representative has suggested that Simon can enhance his situation by receiving a lump-sum benefit check in the amount of approximately $9,500, and then his benefit will be $1,583 per month. It’s only a tiny bit less than the original $1,644, so sounds like a great deal, right?

Read: Don’t let a Social Security employee advise you on what could be one of the most important decisions of your life

The dilemma

What the SSA representative has done is to suggest that Simon backdate his filing from age 64 to his age 63 and 6 months, which puts his filing at 38 months before his FRA. This further reduces his benefit, permanently. This six-month backdating is a standard, accepted procedure at SSA, and it can be done by anyone, simply by requesting it.

The only restriction is that six months is the maximum that the filing date can be backdated, as long as you haven’t otherwise already begun receiving your retirement benefit. This option is often suggested by SSA representatives, perhaps because they are, by human nature, predisposed to try to get the caller the most money right away, if at all possible. No (or precious little) thought is given to longer-term impacts to the caller.

Here’s the dilemma: If he accepts this proposal, Simon will be taking a short-term “fast cash” payment (the $9,500) in exchange for permanently reduced benefit payments. If Simon lives to an average age of around 85, he’ll have given up around $6,000 in benefits (no COLAs are included in this estimate). And if he lives much longer, the gap just widens.

Since Simon has waited this long to file for his Social Security benefit, he obviously didn’t need it up to this point. So why should he second-guess his decision to wait until age 64, only to back up his filing to age 63 and six months, resulting in a smaller monthly payment?

This is not the time or place to get into an analysis of the break-even point for taking one benefit over the other. Social Security is not an investment, it is insurance against living longer than your other money can support you. You hope that you’ll live a nice long time after any supposed break-even point don’t you? So shouldn’t your decisions about funding your life support that?

Put another way, you don’t do a break-even analysis on your homeowner’s insurance do you? The hope in that case is that you never, ever have to use it. Similar principle to the insurance that is Social Security.

Want more retirement news and advice? Check out MarketWatch Retirement

The strategy

However, this six-month backdate can provide a good strategy tool for increasing your Social Security benefit. Let’s say Simon declines the offer for the lump sum, but he is still thinking about filing at his age 64. Knowing that he can backdate his filing age, what if Simon delays his filing? He can wait until six months after his 64th birthday, and then decide if he wants to make the call.

The point is, during those six months, Simon may find that he didn’t need the Social Security retirement benefit at this point, his pension and other savings are doing just fine covering his monthly expenses. 

On the other hand, if he’s worried about spending too much of his IRA when he could be receiving that money in Social Security benefits, he could use the backdate strategy to effectively start his benefit at 64, just like he’d planned.

Read: Not sure where to live in retirement? Try the MarketWatch Where Should I Retire? tool

But on the third hand, if he decides that the extra money he spent during the past six months is not a huge drag on his overall financial security, he could make the decision to adjust his filing date to his current age (at that time), 64 years and 6 months. This would result in an increase (permanent) in his monthly benefit to $1,711 per month.

Once again though, instead of calling SSA right now to request that benefit amount, he waits another six months, since he can always backdate the filing by six months. Once Simon reaches 65, he can go through the same decision making process again — does he need to backdate, or can he file at his current age? Lather, rinse, repeat.

In going through this exercise, many people find that they can delay filing much later than they originally expected to, with a significant increase in monthly benefits. In the long run, a strategy like this can really pay off for some folks.

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