This column is the third of three columns discussing opportunities available to individuals to redo a prior Social Security claiming decision. The first column discussed withdrawing a Social Security claim within the first year of receiving a monthly retirement benefit check. The second column discussed suspending an initial Social Security claim for benefits and then refiling for benefits at some time past full retirement age (FRA). This column discusses making a retroactive claim for Social Security retirement benefits.
The Social Security Administration allows an individual who has passed their full retirement age (FRA) to file for a retroactive retirement benefit if the new filing date does not move their retroactive filing date past their FRA.
SEE ALSO:
The following example illustrates:
Margaret is single and has a full retirement age of 67. She planned to file for her Social Security retirement benefit at age 70. Her monthly Social Security retirement benefit at age 67 (her “primary insurance amount” or PIA) is $2,500 per month. However, at age 68 Margaret is diagnosed with a terminal disease with a life expectancy of age 72. She was advised to apply at age 68 for retroactive benefits which begin at age 67.5. Her monthly benefit will be $2,600 per month ($2,500 per month times 1.04), which reflects six months of delayed retirement benefit. Delayed retirement credits are equal to 8 percent per year for every full year past full retirement age. Six months of delayed retirement credits results in a 4 percent increase in monthly retirement Social Security benefits. In addition, Margaret will receive a lump-sum payment from the Social Security Administration for the months that occurred between her full retirement age (age 67) and her filing date. In other words, Margaret will receive:
6 months x $2,600/month = $15,600.
As a result of filing for 6-months retroactive benefits when she is age 68, her monthly benefit will continue to be $2,600/month. That is, as if Margaret decided to file for her monthly Social Security retirement benefit at age 67.5.
The question is: Did Margaret make the right decision to file for months retroactive benefits and a monthly benefit of $2,600 (rather than a monthly benefit of $2,700 had she filed for her monthly benefit starting the month she became age 68)? What is Margaret’s “breakeven” age? Note that Margaret has been told that she has a life expectancy of age 72.
The following tables summarize what Margaret would receive using either strategy.
Strategy 1: File at age 68 with a life expectancy of age 72 and monthly benefit of $2,700 (1.08 x $2,500).
Strategy 1: Margaret Files at Age 68
Strategy 2: File retroactively at age 67.5 with a life expectancy of age 72 and monthly benefit of $2,600 (1.04 x $2,500).
Strategy 2: Margaret Files Retroactively at Age 67.5
If Margaret files retroactively at age 67.5 and lives to age 72, then her lifetime benefits will be $140,400 less $129,600, or $10,800 more than if she files at age 68. To answer the “breakeven” age question, the difference between her filing and not filing for retroactive benefits is $2,700 less $2,600, or $100 per month. By not filing retroactively, she will forgo the $15,600 lump sum payment. Therefore, dividing the $15,600 by the monthly benefit payment difference of $100, the breakeven age can be determined:
$10,800/$100 month = 108 months, or 9 years.
The “breakeven” age for Margaret is age 67.5 plus 9, or 76.5. In other words, if Margaret files for retroactive benefits and if she were to die before age 76.5, she would have made the right decision to file retroactively. Since Margaret has a life expectancy of four years until age 72, she is correct in filing retroactively at age 67.5.
Understanding the Disadvantages of Retroactive Filing for Social Security Benefits
One of the reasons that an individual waits until FRA (age 65 to age 67, depends on the year the individual was born) to file for Social Security monthly retirement benefits is that it affords the individual options that are not available prior to reaching FRA. One of these options is retroactive benefits.
The purpose of retroactive filing is to allow individuals who are eligible for Social Security benefits and who missed their planned filing date to push back their filing date by up to six months. Most individuals are not aware of retroactive benefits. They find out about retroactive benefits after they have reached their FRA. The idea of a lump-sum payment of as much as six months of Social Security monthly retirement benefits is attractive.
The maximum lump-sum payment will include up to six months of monthly benefits. To receive the maximum six- month lump-sum payment, an individual has to be at least six months past his or her FRA. If an individual is only three months past his or her FRA, the individual will receive three months of retroactive monthly payments.
When an individual files for his or her monthly benefit after reaching their FRA, and then chooses to receive retroactive benefits, the individual’s Social Security filing date is pushed back. The result is a permanently lower monthly retirement benefit and a spousal survivor benefit. The lower monthly benefit can be up to four percent less. As such, an individual who chooses a retroactive benefit is trading a one-time lump-sum payment in return for a permanently lower monthly payment for the rest of the individual’s life, and, if married, for the individual’s spouse’s life with respect to a Social Security monthly widow/widower benefit payment. Does that make financial sense for the individual?
Many retirees today have a fear that they will outlive their retirement savings and determine their filing date for Social Security monthly retirement benefit based on two emotional fear factors, namely: (1) That they will die young; and (2) That the Social Security retirement trust fund will run out of money. If that is the case with respect to dying young, how does that reconcile with the fear of outliving one’s retirement savings?
Since retirees are living longer today than they ever have, a retiree’s fear today should be living too long and not dying too young. Based on Social Security data, a man who has reached age 65 is expected to live on average to age 84.3. A woman who has reached age 65 can expect to live on average to age 86.6. A married couple determining their Social Security filing strategy is therefore advised to consider their joint life expectancy.
Social Security retirement benefits should be viewed as “longevity insurance” that will protect individuals financially, if they live to their 90’s and possibly early 100’s. Federal retirees have additional “longevity insurance” in the form of a CSRS or a FERS annuity (guaranteed pensions) that a federal retiree and designated survivor annuitant will never outlive. If federal employees and retirees follow this logic of not having to worry about running out of income during their retirement, then delaying the start of monthly Social Security retirement benefits, and forgoing a retroactive lump-sum benefit payment, should be a tactic in their retirement strategy.
Some Other Considerations and Questions – Especially for Those Individuals Who Plan to Apply for Their Benefits at Age 70
1. If an individual originally planned to wait until age 70 to file for their Social Security monthly retirement benefits, why would the individual change their mind to file for a retroactive benefit? Why shouldn’t the individual simply file for benefits six months earlier? By filing retroactively, the individual has in effect given an interest free loan to the federal government.
2. The lump-sum payment for retroactive monthly payments is taxable. As such, the lump sum payment received within one calendar year could push the individual into a higher federal marginal tax bracket for that year. Also, the lump-sum payment may exceed the Medicare Part B and Medicare Part D modified adjusted gross limitation amount thereby subjecting the individual to the Medicare Income-Related Monthly Adjustment Amount (IRMAA), thereby increasing (in two years) the Medicare Part B and Medicare Part D monthly premiums.
3. If an individual has not reached the month he or she becomes age 70 (for example, the individual is age 69 and 10 months old) and elects to file for an immediate Social Security monthly benefit, then the individual will automatically receive the lump-sum payment and a retroactive monthly benefit payment (in this case, a lump sum payment equal to four months of a retroactive payments). In order to avoid receiving the lump-sum payment and retroactive monthly payment, the individuals must affirmatively tell Social Security not to provide the retroactive benefits. By not taking the retroactive benefits, the individual will receive all of the delayed retirement credits (8 percent per year, 2/3 of one percent per month), the individual has earned since reaching their FRA.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019