Social Security lump sum rules and strategies

Based on recent email questions from InvestmentNews readers, I detect an increased interest in lump sum payouts of Social Security benefits, perhaps reflecting the economic uncertainties caused by the COVID-19 pandemic.

It is important to note that lump sum payouts of retroactive benefits are available only under certain circumstances. Even then, inconsistent guidelines from the Social Security Administration seem to have inhibited or delayed some payout requests.

One adviser wrote to me last week saying he had suggested to a soon-to-be-retired couple, where both spouses are 63 years old, that they apply for six months of retroactive Social Security benefits. He was surprised when the Social Security Administration informed the clients that retroactive benefits are not available before full retirement age.

The adviser asked me if that is correct. Yes, it is.

Individuals who are full retirement age or older when they file for Social Security have the right to request a lump sum payment of up to six months of retroactive benefits, beginning no sooner than their full retirement age. Because a portion of their past benefits are paid out in a lump sum, their future monthly benefits will be slightly smaller.

If you postpone claiming Social Security beyond your full retirement age, your benefit increases by 0.66% per month — for a total of 8% per year in delayed retirement credits — up until age 70. However, you cannot receive a lump sum payout and delayed retirement credits for the same period.

For example, if your full retirement age is 66 and you wait until 67 to claim benefits, you can request a lump sum payout of six months of retroactive benefits. But if you applied at 66 and 3 months, you could only receive three months of benefits in a lump sum as retroactive benefits cannot be paid before full retirement age.

Earlier this year, I reported how some legitimate requests for lump sum payouts were initially denied by the Social Security Administration. At the time, I asked the Social Security Administration if there had been a policy change or temporary administrative holds on requests for lump sum retroactive benefits.

“We temporarily adjusted our procedures to hold the release of retroactive payments to applicants who many need additional time to provide any necessary evidence due to unexpected circumstances from the COVID-19 pandemic,” public affairs specialist Nicole Tiggemann replied to me by email in May. Clear as mud!

Last month, I received an email from an InvestmentNews reader who shed some light on the murky lump sum request procedure.

Warren Strauss, a financial adviser in Sarasota, Florida, said one of his clients had requested a lump sum payout of retroactive benefits, but nothing happened for more than three months.

“I had gotten all kinds of unimaginable explanations for the delay for my client, until I spoke with a supervisor who admitted that she was not trained in this special request,” Strauss wrote in an email. The supervisor investigated and learned that a “wet signature” — a handwritten signature — is required for such requests. 

“My client submitted the request in writing via fax,” he said. “The six months in back benefits funds arrived in client’s checking account within a few days after submitting the request in writing via fax.”

I complimented Mr. Strauss, telling him he was like Indiana Jones unearthing a secret treasure! But even the wet signature solution may not always do the trick, said Matthew Allen, CEO of Social Security Advisors, a consulting service that helps financial advisers and consumers optimize their claiming strategies and file for benefits.

“Social Security has issued guidance that suggests claims representatives request additional identification and increase their level of scrutiny for lump sum payouts during COVID,” he said. “However, the execution of this has been anything but consistent.”

Allen said he has heard Social Security representatives suggest various protocols, from requiring wet signatures to faxing IDs to making an appointment and coming into an office, though offices have been closed to the public since mid-March due to COVID. 

“When we run into this for clients, we escalate the matter beyond the local office to the Regional Commissioner’s office, citing the rules and regulations that require SSA to pay these funds,” he explained. “We have had success with every case we’ve had to deal with like this.”

I asked the Social Security Administration for an update on how the agency is handling requests for lump sum payments of retroactive benefits.

“Agency employees continue to work remotely to provide the vital services the public relies on through online services and phone services,” Ms. Tiggemann said via email last week. “However, we have provided guidance to our field offices to schedule in-office dire need appointments to obtain required evidence where applicable.”

Clear as mud. Bottom line to advisers: If your clients are eligible for a lump sum payout, be persistent, and get help if you need it.

Related Topics: Retirement