Boatman: Looking at lump-sum Social Security payments
By Gary Boatman
Published: Wednesday, Oct. 23, 2013, 12:01 a.m.
This week, we will take our monthly look at Social Security.
Sometimes you may hear about someone who receives lump-sum Social Security payments. This only happens after someone has reached full retirement age.
For baby boomers, this is usually age 66. You could receive a lump sum for up to 6 months.
This would occur if you were 66 ½ and then filed for benefits. You could receive up to six months and your Social Security would be calculated at full PIA (primary insurance amount.) As an option, instead of this lump sum, your future benefits could be calculated at the higher value for delaying payments an extra six months.
It is important to remember that every month you delay increases benefits. It does not have to be full years.
If someone age 66 and three months were to apply, they would only receive 3 months' worth of lump sum, not six months. This option is not available until full retirement age. It can be activated later up to age 70.
Remember, these retroactive benefits are not mandatory. Taxes, if due from the receipt of retroactive benefits, are paid during the year the money is received. You do not have to file an amended return for the prior year.
This may or may not push you into a higher income tax bracket.
It is important to remember that strategies to boost Social Security cannot be employed until both spouses are full retirement age.
Let's say that a husband is 66 and his wife is 64. If the husband were to file and suspend and the wife filed for spousal benefits, it would affect her benefits going forward. This means she would be required to collect her reduced benefit first and possibly top it off with a spousal benefit. Because she is trying to collect spousal benefits before her full retirement age, she would only be entitled to 41.7 percent of spousal benefits in total instead of the 50 percent if she were at full retirement age.
Because her own benefit has started, it will not continue to grow. Additionally, her earnings from working are subject to the earning test. One dollar would be withheld for every two dollars earned over $15,300.
These issues would not exist if she were at full retirement age.
At that time, there is no earning test and she could file and suspend. Both spouses' future Social Security payments would continue to rise.
This free money is not calculated by many people when they do a simple break-even analysis.
If there is a big difference in the age and earnings of a couple, there can be dramatic advantages of Social Security planning.
If the older spouse has reached full retirement age and the younger spouse is say 60, he cannot file and suspend because the younger spouse is not eligible to begin collecting benefits.
Sometimes people do not receive all of the benefits they think they should because of the Windfall Elimination Provision. These are usually government workers who paid into a different retirement plan than Social Security.
In 1983, the law was changed that brought WEP into existence. Social Security is designed to replace more of a low-earning wage workers income than someone who earned more. Social Social replaces 90 percent of the first $791 per month, 32 percent of the next $3,977 and 15 percent of the remainder.
Because of this, some people were working 20 years for the government and then retiring with a pension and taking a low-paying private sector job that they collected Social Security from. The government wanted to curb this practice.
If a person has 30 years or more of substantial earning under Social Security, they will receive full Social Security plus any public pension. For 2013, substantial earning is $21,075. For workers who have fewer than 30 years, their Social Security benefit could be reduced to as little as 40 percent. This rule can also affect spouses.
Social Security is an important retirement asset. Take the time to learn the strategies to maximize your return. It could provide substantial additional income and create the opportunity for a more fulfilling retirement.
Gary Boatman is a certified financial planner and a local businessman who serves as president of the Monessen Chamber of Commerce.
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