By: Paul Horn, CFP®, CPWA®, Senior Financial Planner
Deciding when to claim Social Security benefits will have a permanent impact on the benefit you receive. Claiming before your full retirement age (66-67 based on birth year) can significantly reduce your benefit, while delaying increases it. More than ever, we are seeing more individuals not collect their Social Security until they receive their full benefits.
Some clients when they go to file, find out that they have the opportunity to get a large paycheck from Social Security by receiving what is known as a retroactive benefit. When most people hear this, they will jump on the opportunity because who doesn’t want a nice windfall like that? While receiving a large check is appealing what is not discussed is the dangers of choosing this option.
How the retroactive benefit works
The retroactive Social Security benefit allows an individual to choose to start social security six months before the day they claim benefits and by doing so they will receive a one-time check for those 6 months of benefits. The danger of this strategy is that you are going to receive a smaller paycheck for the rest of your life. A retroactive check is only available to those that claim benefits on or after their Full Retirement Age (FRA). You can look at the chart below to see what age this is for you:
Example
Sally will be 67 and a half in August and is looking to start her Social Security. She speaks with Social Security, and they offer her the option to take the retroactive check and begin collecting as though she was 67. If she takes the benefit at 67 and gets the retroactive check, she will receive monthly benefit of $3,000. If Sally decides to start the benefits at 67.5, she will receive $3,120 a month instead. This difference is small but can add up over retirement. Below is a chart showing the total amount from Social Security she would receive from each option:
| Age | Cumulative benefit @ 67 (Retroactive Benefit) | Cumulative benefit @ 67.5 |
| 68 | $ 36,000 | $ 18,720 |
| 69 | $ 72,000 | $ 56,160 |
| 70 | $ 108,000 | $ 93,600 |
| 71 | $ 144,000 | $ 131,040 |
| 72 | $ 180,000 | $ 168,480 |
| 73 | $ 216,000 | $ 205,920 |
| 74 | $ 252,000 | $ 243,360 |
| 75 | $ 288,000 | $ 280,800 |
| 76 | $ 324,000 | $ 318,240 |
| 77 | $ 360,000 | $ 355,680 |
| 78 | $ 396,000 | $ 393,120 |
| 79 | $ 432,000 | $ 430,560 |
| 80 | $ 468,000 | $ 468,000 |
| 81 | $ 504,000 | $ 505,440 |
| 82 | $ 540,000 | $ 542,880 |
| 83 | $ 576,000 | $ 580,320 |
| 84 | $ 612,000 | $ 617,760 |
| 85 | $ 648,000 | $ 655,200 |
| 86 | $ 684,000 | $ 692,640 |
| 87 | $ 720,000 | $ 730,080 |
| 88 | $ 756,000 | $ 767,520 |
| 89 | $ 792,000 | $ 804,960 |
| 90 | $ 828,000 | $ 842,400 |
What we see from this chart (far right column) that if Sally lives past age 80, she will receive more benefits over her lifetime by not selecting the retroactive benefit. With that being said, she only will receive an additional $14,400 over her lifetime.
What is the best decision for me?
The decision of taking a retroactive check from Social Security is ultimately a personal one. If longevity is in your family, it can be beneficial to not take the retroactive option since it reduces your Social Security benefit. However, the difference is not that large in the grand scheme of things so it is up to you on how you choose to proceed.
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