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Watch Out for This Social Security Hidden Trap

Retirement Daily on The Street 3/8/2023 Marcia Mantell

If you're planning to wait to claim your benefits, you must make a choice that could be a costly trap. Here's what you need to know.

By Marcia Mantell, RMA®, NSSA®

When Social Security began paying retirement benefits in 1940, there were no lines of retirees anxiously waiting to collect monthly benefits. The idea of a handout was unappealing, even though paychecks had been docked to pay into the system. Today, we can’t even imagine thinking of skipping out on Social Security payments! A little history on the program may help you understand and avoid a common pitfall people encounter today. 

In The Beginning: Confusion Was Common 

The initial years of Social Security were fraught with confusion. Not all workers were covered. Among those not eligible included:

  • Self-employed people (including architects, CPAs, engineers)
  • Those working in Federal and State government jobs
  • Those working in domestic service jobs.

In the original 1935 law, wives, widows, and children were also not covered. Then, the 1939 Amendments expanded coverage. Wives, widows, and other dependents became eligible for family benefits.

Contributions via payroll taxes began in 1936, but benefits would not be paid until 1942. Then the starting date changed to 1940.

This new law was changing rapidly, and individuals struggled to figure out the process.

Retroactive Payments: an Accommodation for the Confusion

On the surface, the process should have been easy. A qualifying worker, his wife, or a widow must reach age 65 AND apply for benefits. But, if they failed to apply on time, missed payments would be forfeited. Many retirees at the outset did not understand this and risked a substantial loss of income.

a woman wearing a blue shirt: Marcia Mantell © Provided by Retirement Daily on The Street Marcia Mantell

To help ease a rocky and confusing transition period, an accommodation was included in the Social Security Act: if someone applied after age 65, a 3-month retroactive payment would be made.

Retroactive payments were designed to accommodate the mistake if one inadvertently missed the date to file for benefits. Or, if an individual worked a few months after age 65, they would still get a payment as though they had claimed on time.

Over the many different amendments to the Social Security Act, the retroactive period changed from three months to a shift between 6 and 12 months.

Today, a 6-month retroactive payment window is available when one claims after their Full Retirement Age.

We Now Also Have Delayed Retirement Credits

From the beginning of Social Security, each worker had a calculated retirement benefit. This was the Primary Insurance Amount, or PIA. It was a set dollar amount they would receive once they reached age 65, stopped working, and claimed the benefit. If they didn’t claim at 65, they left money on the table.

The 1972 Social Security amendments established a new incentive for people to wait a little longer to retire and begin receiving benefits. It established a new “Full Retirement Age” (FRA) after which retirees could receive additional benefits called delayed retirement credits (DRCs). These are extra “bonus” dollars you earn on your Primary Insurance Amount by waiting to claim after your Full Retirement Age. 

Today, you can get a bump of 8% per year in DRC by waiting to claim between your FRA and age 70. Back at the beginning there was no bonus, no incentive, for waiting to claim after age 65.

The Choice: Delayed Retirement Credits or A 6-Month Lump Sum

Today, many workers and retirees who delayed claiming benefits are surprised to learn they will have a choice to make if they claim after their FRA:

  • They can get a boosted monthly payment, or
  • They can get up to six months of back pay all at once.

If you’re planning to claim at or just after your FRA, it might work well to take a 6-month lump-sum payout. Say your budget is planned for $3,000 per month from Social Security. You’re willing to forego the 4% increase (6 months of delayed retirement credits) and prefer the lump-sum payment. You’ll still get benefits paid at $3,000 per month going forward.

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But it’s important to note that you lose the “bumped up” monthly amount. The comparison looks like this:

  • If you had claimed right at FRA, you’d have collected $18,000 in the first six months and $36,000 for the first 12 months.
  • If you waited 6 months, your monthly benefit would increase to $3,120 beginning in the seventh month. You’d be paid for six months and only receive $18,720 at the end of that original 12-month period.
  • You have a choice. You can reset monthly payments back to $3,000 plus receiving a retroactive check for $18,000. This way, you’ll collect $36,000 in seven months representing all 12 months.

This is the intended purpose of the retroactive period. To make your initial year whole as if you claimed at your FRA.

The Hidden Trap Awaits Those Claiming at 70

Social Security agents are familiar with the 6-month lump sum rule and tend to “offer” it to everyone who claims after their FRA. But this gives no regard to the long-term financial consequences of the decision.

When the strategy is to wait to claim benefits until age 70, because one is still working, doesn’t need the money, or is waiting until 70 to maximize benefits, they clearly have a plan in place. They (and their financial advisor) have decided that waiting offers the best Social Security retirement and surviving spouse benefits.

So, it is often quite a surprise to be offered a 6-month lump-sum payment when they claim. During a call with a Social Security agent, the agent explains to the caller they are eligible for a one-time lump-sum cash payment. It’s often in the $20,000 to $30,000 range. That’s a significant “bonus” the caller wasn’t expecting.

The agent explains they’ll get the same amount of benefits with a sizable chunk up front. However, that’s not the case. The retroactive lump-sum only affects the first 12 months. And then, they’ll get less.

Unfortunately, this is a costly hidden trap. Monthly payments are significantly reduced when choosing the lump-sum option. And a surviving spouse gets a lot less than planned.

Understand the Math to Choose Wisely

It’s important to understand how your benefit is calculated behind the scenes. Your initial PIA is determined when you reach age 62. It’s based on your highest 35 years of earnings up to that point.

If you claim at 62, the maximum reduction factor will be applied, and your benefit will be the lowest possible amount. However, as you wait each year, getting closer to your FRA, you’ll see that your PIA increases…even if you are no longer working. That’s because:

  1. The reduction factor is improving; and
  2. The cost-of-living adjustment (COLA) is applied.

Once you reach FRA and still haven’t claimed, your benefit amount continues to grow by both COLAs and DRCs. This combination is a powerful multiplier effect.

Looking at someone born in 1952, FRA was 66 in 2018, and they reached 70 in 2022. Their initial PIA was set in 2014 when they were 62. Using the actual COLAs since 2014, here’s what happens with and without the 6-month retroactive lump-sum payout:

  • Maximum monthly benefit at age 70 is about $4,620/month.
  • After the 6-month lump-sum “offer”, monthly benefit amount is reset and reduced to about $4,280/month.

That’s a $340/month reduction in monthly benefits!

The lump-sum payment is about $25,700. But giving up $340 in monthly benefits is a hidden trap. Assuming 25 years in retirement, monthly benefits will actually be shorted $650/month by the end (assuming a straight-line 2.5% COLA).

If married, the surviving spouse steps into a significantly lower monthly benefit in their oldest years.

The Bottom Line

The original purpose of the retroactive period was to ensure workers got their correct payment in their first year of benefits. The program was new and confusing in the 1940s. Providing a short window to accommodate incorrect timing was reasonable.

Today, maximizing Social Security is a clear strategy for many. Until they get a surprise and a tempting offer from the SSA. It’s hard to say no to $25,000.

From those who have received the lump sum, they often happily report how they spent it right away. Renovations on their house. Vacation for the extended family. Paid off their mortgage.

This lump-sum check is rarely, if ever, invested for future income.

That, at the end of the day, is the worst part of the 6-month retroactive lump-sum trap. If the money were invested at 8%, for example, the lump-sum could end up being favorable. But that’s a tall order when Hawaii is calling…

About the author: Marcia Mantell, RMA®, NSSA®

Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business and education company. She’s author of “What’s the Deal with Retirement Planning for Women,” “What’s the Deal with Social Security for Women,” “Cookin’ Up Your Retirement Plan,” and blogs at

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