Social Security Question [Social Security Offering Lump Sum]

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donna911
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Social Security Question [Social Security Offering Lump Sum]

Post by donna911 »

I waited until I turned 70 to collect $3214 a month from SS.
I was called by an agent asking if I would like to take a lump sum of $27,000 which would reduce my future benefits by $146 a month.
I was told that I would break even at around 15 years, but I don't think it is entirely accurate since I will probably be paying taxes on that lump sum of $27k.

$27000 lump sum + (ss payments 3068 x 12) = $64250 for the year, PLUS your earned income of about $60,000. I'm guessing i'd be in the 25% federal bracket, so that 27k will probably be more like $20k, or more like 11 years to 'break even'.

I don't want to make this decision based on my life expectancy of 11 or 15 years because even if I didn't make it that long, my wife's benefit would be based on my monthly benefit with the reduction.

I don't need the lump sum but would like to know if its a better 'deal' to take the full 3214/month- and not the lump sum.
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TomatoTomahto
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Re: Social Security Question

Post by TomatoTomahto »

Called by an agent of whom?

ETA: doesn’t sound right. Sounds like one of those structured settlement cons that are advertised during daytime TV Shows.
I get the FI part but not the RE part of FIRE.
stats99
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Re: Social Security Question

Post by stats99 »

Seems Prof. Kotlikoff has reported this may in fact happen.

http://www.seattletimes.com/business/an ... -security/
JBTX
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Re: Social Security Question

Post by JBTX »

I too am puzzled by who is offering this.

This basically amounts to a backwards annuity of 6.5%. It effectively sounds like a loan.

Why would you defer SS to 70, presumably to get better payouts, and then turn around a get in a deal to extract money and lower your payouts on a net basis?
BHUser27
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Re: Social Security Question

Post by BHUser27 »

The general consensus seems to be against taking the lump sum. Here are a few articles that might help...
http://www.uniondemocrat.com/business/5 ... er=section
https://www.forbes.com/sites/kotlikoff/ ... 0588fd236e
http://www.chicagotribune.com/business/ ... story.html
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ResearchMed
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Re: Social Security Question

Post by ResearchMed »

donna911 wrote: Mon Sep 25, 2017 4:23 pm I waited until I turned 70 to collect $3214 a month from SS.
I was called by an agent asking if I would like to take a lump sum of $27,000 which would reduce my future benefits by $146 a month.
I was told that I would break even at around 15 years, but I don't think it is entirely accurate since I will probably be paying taxes on that lump sum of $27k.

$27000 lump sum + (ss payments 3068 x 12) = $64250 for the year, PLUS your earned income of about $60,000. I'm guessing i'd be in the 25% federal bracket, so that 27k will probably be more like $20k, or more like 11 years to 'break even'.

I don't want to make this decision based on my life expectancy of 11 or 15 years because even if I didn't make it that long, my wife's benefit would be based on my monthly benefit with the reduction.

I don't need the lump sum but would like to know if its a better 'deal' to take the full 3214/month- and not the lump sum.
You probably want to take the maximum monthly SS benefit for two reasons.
One, as you've noted, is that your wife's benefit will be based upon yours (not the case for all couples, but it is in yours).
Second, this will increase the survivor's benefit, for the life of the survivor.

RM
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Ron
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Re: Social Security Question

Post by Ron »

Short term gain; long term pain :twisted: ...

Since I turn 70 in January, I'll expect the call in the next few months. Now I have to come up with a "phone script" (like they read from) as a comeback to their proposal.

- Ron
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David Jay
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Re: Social Security Question

Post by David Jay »

There are 2 ways of looking at Social Security. One is "best return". The other is "longevity insurance". Where you start pretty much determines where you end up.

If you want maximum return and you don't know how long you will live, you will probably take as much as soon as possible. Since you might die at 65-70-75, maybe you should claim at 62, etc. This is what the lump sum is offering - if you die early at least you have gotten "your share".

I come from the longevity insurance view. Waiting until 70 assures my wife (on an actuarial basis she should outlive me) the maximum inflation protected income if she lives into her 90s. Don't take the lump sum if you take this view.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
JW-Retired
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by JW-Retired »

donna911 wrote: Mon Sep 25, 2017 4:23 pm I waited until I turned 70 to collect $3214 a month from SS.
I was called by an agent asking if I would like to take a lump sum of $27,000 which would reduce my future benefits by $146 a month.
Obvious answer..... why would an "agent" con man spend time calling hundreds or thousands of people trying to find a willing victim to fleece, if it was anything but good deal for him and consequently a bad deal for you?

Don't ever answer such cold calls.

Welcome to the forum!
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fishandgolf
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by fishandgolf »

JW-Retired wrote: Mon Sep 25, 2017 7:39 pm
donna911 wrote: Mon Sep 25, 2017 4:23 pm I waited until I turned 70 to collect $3214 a month from SS.
I was called by an agent asking if I would like to take a lump sum of $27,000 which would reduce my future benefits by $146 a month.
Obvious answer..... why would an "agent" con man spend time calling hundreds or thousands of people trying to find a willing victim to fleece, if it was anything but good deal for him and consequently a bad deal for you?

Don't ever answer such cold calls.

Welcome to the forum!
JW

+1.......I totally agree!
montanagirl
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by montanagirl »

I am 68 and sorta thinking about filing at 69 or so. I won't have a spouse or survivor to worry about. But I would hate to mess up my current zero tax bracket with a lump sum.

I wonder if you could claim it ratably over 5 years.
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BTDT
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by BTDT »

Run.....don't walk away from this scam :oops:
If past history was all that is needed to play the game of money, the richest people would be librarians.
IowaFarmBoy
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by IowaFarmBoy »

An article in Kiplinger's indicates this is legit but may or may not be a good deal for you. It sounds like if you are past full retirement age, they give you the option of getting six months retroactive benefits but they then adjust your benefit amount as if you had started collecting benefits six months sooner.

http://www.kiplinger.com/article/retire ... youts.html
neilpilot
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by neilpilot »

IowaFarmBoy wrote: Mon Sep 25, 2017 8:22 pm An article in Kiplinger's indicates this is legit but may or may not be a good deal for you. It sounds like if you are past full retirement age, they give you the option of getting six months retroactive benefits but they then adjust your benefit amount as if you had started collecting benefits six months sooner.

http://www.kiplinger.com/article/retire ... youts.html
That's what I though the OP was describing, as well. Except that, while I also thought the retro payout offer was for 6 months, the OP's $27k seems to be closer to 9 months. That is puzzling.
montanagirl
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by montanagirl »

BTDT wrote: Mon Sep 25, 2017 8:15 pm Run.....don't walk away from this scam :oops:
You mean it's not really the SSA offering, or that it's a bad deal?

I might go for a 6 mo lump sum for a 4% permanent reduction, since I was thinking of filing a bit earlier anyway.

But it's troubling that they would call instead of write. I hope it isn't a sign of desperation.
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by #Cruncher »

donna911 wrote: Mon Sep 25, 2017 4:23 pmI was told that I would break even at around 15 years, but I don't think it is entirely accurate ... $27000 lump sum + (ss payments 3068 x 12) = $64250 [s/b $63,816] for the year, PLUS your earned income of about $60,000. I'm guessing i'd be in the 25% federal bracket, so that 27k will probably be more like $20k, or more like 11 years to 'break even'.
Considering taxes does not significantly change the 15 year break even. The marginal tax rate as SS increases [*] with these values for SS and other income is about 11% or 13%, not 25%. This is shown at the bottom of the table below comparing these three cases. (I prepared the table with the Compare sheet of my Marginal Tax Rates spreadsheet for a 2017 Joint return with the standard deduction for an age 65+ couple.)
  • Case L71+: Age 71 and after if take lower benefit
  • Case H70+: Age 70 and after if take higher benefit
  • Case L70: Age 70 including lump sum if take lower benefit

Code: Select all

Social Security 50% threshhold    32,000   -------------->
Social Security 85% threshhold    44,000   -------------->
Ord Income Tax Bracket 15%        18,650   -------------->
Ord Income Tax Bracket 25%        75,900   -------------->
Ord Income Tax Bracket 28%       153,100   -------------->

Code: Select all

                                   L71+      H70      L70
                                  ------   ------   ------
Non-SS Ordinary Income            60,000   60,000   60,000
Social Security Benefit           36,816   38,568   63,816
SS Relevant Income                78,408   79,284   91,908 [*]
50% SS taxable                     6,000    6,000    6,000
85% SS taxable                    25,294   26,783   40,722
Total SS taxable                  31,294   32,783   46,722
Adjusted gross income             91,294   92,783  106,722
Deductions plus Exemptions        23,300   23,300   23,300
Taxable Income                    67,994   69,483   83,422

Code: Select all

Ordinary taxable @ 25%               -        -      7,522
Ordinary taxable @ 15%            49,344   50,833   57,250
Ordinary taxable @ 10%            18,650   18,650   18,650
Ordinary tax @ 25%                   -        -      1,880
Ordinary tax @ 15%                 7,402    7,625    8,588
Ordinary tax @ 10%                 1,865    1,865    1,865
Total tax                          9,267    9,490   12,333
Income after tax                  87,549   89,078  111,483

Increased SS benefit                   1,752   25,248
Increased tax                            223    2,843
Increased incom after tax              1,529   22,405 <--
Marginal tax rate                     12.75%   11.26%
Age 71 and after you'd get $1,529 more each year after taxes with the higher benefit. For age 70 you'd get $22,405 more after taxes by taking the lower benefit with the $27,000 lump sum. The breakeven is thus about 14.7 years (22405 / 1529).

The following table of the year-by-year cash flows also shows the breakeven around that long (age 85). The far right column also shows the implicit Internal Rate of Return (IRR) from taking the higher benefit. For example it shows that if either you or your spouse live to age 90, you'll get a 3.2% after tax real return by forsaking the lump sum. (Calculated with the Excel IRR function).

Code: Select all

     --- Benefit ---  -- Difference --
Age  Reduced   Full     Year     Cum      IRR

Code: Select all

 70  111,483  89,078 (22,405) (22,405)
 71   87,549  89,078   1,529  (20,876)
 72   87,549  89,078   1,529  (19,347)
 73   87,549  89,078   1,529  (17,818)
 74   87,549  89,078   1,529  (16,289)
 75   87,549  89,078   1,529  (14,760)
 76   87,549  89,078   1,529  (13,231)
 77   87,549  89,078   1,529  (11,702)
 78   87,549  89,078   1,529  (10,173)
 79   87,549  89,078   1,529   (8,644)
 80   87,549  89,078   1,529   (7,115)
 81   87,549  89,078   1,529   (5,586)   (4.5%)
 82   87,549  89,078   1,529   (4,057)   (2.9%)
 83   87,549  89,078   1,529   (2,528)   (1.7%)
 84   87,549  89,078   1,529     (999)   (0.6%)
 85   87,549  89,078   1,529      530     0.3% 
 86   87,549  89,078   1,529    2,059     1.1% 
 87   87,549  89,078   1,529    3,588     1.7% 
 88   87,549  89,078   1,529    5,117     2.3% 
 89   87,549  89,078   1,529    6,646     2.7% 
 90   87,549  89,078   1,529    8,175     3.2% <--
 91   87,549  89,078   1,529    9,704     3.5% 
 92   87,549  89,078   1,529   11,233     3.9% 
 93   87,549  89,078   1,529   12,762     4.1% 
 94   87,549  89,078   1,529   14,291     4.4% 
 95   87,549  89,078   1,529   15,820     4.6% 
 96   87,549  89,078   1,529   17,349     4.8% 
 97   87,549  89,078   1,529   18,878     5.0% 
 98   87,549  89,078   1,529   20,407     5.2% 
 99   87,549  89,078   1,529   21,936     5.3% 
100   87,549  89,078   1,529   23,465     5.4%
neilpilot wrote: Mon Sep 25, 2017 8:46 pm... I also thought the retro payout offer was for 6 months, the OP's $27k seems to be closer to 9 months.
It looks like 9 months to me also. The age 70 benefit is $3,214 this means the Primary Insurance Amount (PIA) at age 66 normal retirement age (NRA) would be $2,435 (3214 / 1.32). A $146 reduction is almost exactly 6% of this. 6% is 9/12 of the 8% annual increase one gets by delaying beyond NRA.

After applying online to begin benefits at age 70, someone from the SS administration phoned to confirm my application. She made a similar offer. I don't remember the specifics since I was determined to take the higher benefit and quickly declined the offer.

* This low marginal rate comes about because only 50% of SS benefits are included in "relevant income". (See Taxation of Social Security benefits in the Wiki for an explanation.) The marginal rate as SS benefits increase is completely different from the marginal rate as non-SS ordinary income increases.
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teen persuasion
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by teen persuasion »

Could the apparent 9 months vs 6 months be due to a spousal application? IOW, both the OP's 6 months retroactive payments + 6 months retroactive spousal payments (somewhat less than half the OP's payment).
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donna911
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by donna911 »

I just wanted to thank everyone for their quick responses to my Social Security question.
You all provided me with great information and I have decided not to accept the lump sum payout. :happy
Thanks again
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by jbuffett »

#Cruncher wrote: Tue Sep 26, 2017 6:31 am Age 71 and after you'd get $1,529 more each year after taxes with the higher benefit. For age 70 you'd get $22,405 more after taxes by taking the lower benefit with the $27,000 lump sum. The breakeven is thus about 14.7 years (22405 / 1529).

Don't these calculations assume that the earned income remains a constant?

Also, if the lump sum is not needed, perhaps it could be invested. What if they could return 5% over the next 15 years?
JW-Retired
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by JW-Retired »

donna911 wrote: Mon Sep 25, 2017 4:23 pm I waited until I turned 70 to collect $3214 a month from SS.
I was called by an agent asking if I would like to take a lump sum of $27,000 which would reduce my future benefits by $146 a month.
donna911 wrote:I just wanted to thank everyone for their quick responses to my Social Security question.
You all provided me with great information and I have decided not to accept the lump sum payout. :happy
Thanks again
I think you made the right decision. Mainly since, as much as possible, this minimizes the cut in family SS income if your wife becomes a widow. (Which they more often than not do.)

I'm still flabbergasted that real SS agents are calling people and offering this kind of do over. I'm sure they have better things they could be doing.
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TomatoTomahto
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by TomatoTomahto »

JW-Retired wrote:I'm still flabbergasted that real SS agents are calling people and offering this kind of do over. I'm sure they have better things they could be doing.
I’m sure it’s not the worst thing my tax dollars are funding, but I’m sure it’s not the best either.
I get the FI part but not the RE part of FIRE.
CurlyDave
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Re: Social Security Question

Post by CurlyDave »

Ron wrote: Mon Sep 25, 2017 6:42 pm...Since I turn 70 in January, I'll expect the call in the next few months. Now I have to come up with a "phone script" (like they read from) as a comeback to their proposal...
The only script you need is: "No, thanks."
Answering a question is easy -- asking the right question is the hard part.
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by HueyLD »

donna911 wrote: Mon Sep 25, 2017 4:23 pm I waited until I turned 70 to collect $3214 a month from SS.
I was called by an agent asking if I would like to take a lump sum of $27,000 which would reduce my future benefits by $146 a month.
I was told that I would break even at around 15 years, but I don't think it is entirely accurate since I will probably be paying taxes on that lump sum of $27k.

$27000 lump sum + (ss payments 3068 x 12) = $64250 for the year, PLUS your earned income of about $60,000. I'm guessing i'd be in the 25% federal bracket, so that 27k will probably be more like $20k, or more like 11 years to 'break even'.

I don't want to make this decision based on my life expectancy of 11 or 15 years because even if I didn't make it that long, my wife's benefit would be based on my monthly benefit with the reduction.

I don't need the lump sum but would like to know if its a better 'deal' to take the full 3214/month- and not the lump sum.
If you search the forum, you will find an old thread where a poster had a similar situation and sscritic and penguin provided excellent and in-depth replies, including quotes from relevant SSA POMs. The situation is called PROTECTIVE FILING.

viewtopic.php?t=59733
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TomatoTomahto
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by TomatoTomahto »

If I knew more about SS than I do, I might think that if the OP called three months before the 70th birthday and established a protective filing date, six months retroactivity from that date would explain the nine months. :D
I get the FI part but not the RE part of FIRE.
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HueyLD
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by HueyLD »

Tomato tomahto,

I agree with your math. BTW, you have a very sharp mind in math. :)
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by #Cruncher »

jbuffett wrote: Tue Sep 26, 2017 4:00 pm
#Cruncher wrote: Tue Sep 26, 2017 6:31 am Age 71 and after you'd get $1,529 more each year after taxes with the higher benefit. ...
Don't these calculations assume that the earned income remains a constant?
Yes, they did. I didn't realize the original post referred to $60,000 of earned income, rather than just other income. Since "earned" implies wages or the like, it's quite possible the amount might decline after age 70 when the original poster or the spouse stops working.

So I recalculated the additional after tax income from taking the higher benefit versus the lower benefit for ages 71 to 100. [*] Instead of just using $60,000 of non-SS ordinary income, I also calculated the results for three other amounts: $15,000, $30,000, and $45,000. The results are shown in the table below. It shows that with the three lower amounts of non-SS income, taking the higher SS benefit produces better returns versus taking the lump sum and the lower benefit.

For example with $60,000 of non-SS income, taking the higher SS benefit has an Internal Rate of Return (IRR) of 3.2% if benefits continue to age 90. But if non-SS income were $15,000, $30,000, or $45,000 the IRR would be 4.7%, 4.0%, or 3.9% respectively at that age.

Code: Select all

      Cash Flow Given non-SS Ord Income     IRR Given non-SS Ord Income
      ---------------------------------    ------------------------------
      15,000   30,000   45,000   60,000    15,000  30,000  45,000  60,000

Code: Select all

 70  (22,405) (22,405) (22,405) (22,405)
 71    1,752    1,677    1,640    1,529
 72    1,752    1,678    1,640    1,529
 73    1,752    1,660    1,641    1,529
 74    1,752    1,640    1,641    1,529
 75    1,752    1,640    1,640    1,529
 76    1,752    1,640    1,641    1,529
 77    1,752    1,640    1,641    1,529
 78    1,752    1,640    1,640    1,529
 79    1,752    1,640    1,641    1,529
 80    1,752    1,641    1,640    1,529
 81    1,752    1,640    1,640    1,529    (2.4%)  (3.4%)  (3.4%)  (4.5%)
 82    1,752    1,641    1,640    1,529    (1.0%)  (1.9%)  (1.9%)  (2.9%)
 83    1,752    1,641    1,640    1,529     0.2%   (0.6%)  (0.7%)  (1.7%)
 84    1,752    1,640    1,640    1,529     1.2%    0.4%    0.3%   (0.6%)
 85    1,752    1,640    1,640    1,529     2.1%    1.2%    1.2%    0.3% 
 86    1,752    1,641    1,640    1,529     2.8%    2.0%    1.9%    1.1% 
 87    1,752    1,641    1,614    1,529     3.4%    2.6%    2.5%    1.7% 
 88    1,752    1,641    1,548    1,529     3.9%    3.1%    3.0%    2.3% 
 89    1,752    1,640    1,529    1,529     4.3%    3.6%    3.5%    2.7% 
 90    1,752    1,641    1,529    1,529 --> 4.7%    4.0%    3.9%    3.2% <--
 91    1,740    1,640    1,529    1,529    [5.0%]   4.3%    4.2%    3.5%
 92    1,699    1,640    1,529    1,529     5.3%    4.6%    4.5%    3.9% 
 93    1,677    1,641    1,529    1,529     5.6%    4.9%    4.7%    4.1% 
 94    1,677    1,640    1,529    1,529     5.8%    5.1%    5.0%    4.4% 
 95    1,678    1,641    1,529    1,529     6.0%    5.4%    5.2%    4.6% 
 96    1,677    1,641    1,529    1,529     6.1%    5.5%    5.4%    4.8% 
 97    1,678    1,640    1,529    1,529     6.3%    5.7%    5.5%   [5.0%]
 98    1,677    1,640    1,529    1,529     6.4%    5.9%    5.7%    5.2% 
 99    1,677    1,640    1,529    1,529     6.5%    6.0%    5.8%    5.3% 
100    1,677    1,640    1,529    1,529     6.6%    6.1%    5.9%    5.4%
jbuffett in same post wrote:Also, if the lump sum is not needed, perhaps it could be invested. What if they could return 5% over the next 15 years?
The IRR columns of the table show this. For example, with my original assumption of $60,000 of non-SS other income, taking the higher SS benefit produces the same cash value at age 97 as taking the lower benefit and investing the $22,405 after tax result of the lump sum at a 5% after tax real return. If the non-SS other income were only $15,000, one would match the 5% return by age 91.

* I calculated the after tax income for ages 71 to 100 for both the lower and higher SS benefits. The amounts in the table are the differences of these two amounts. I assumed 2% inflation and therefore reduced the 50% and 85% SS thresholds 2% per year. This is necessary because my analysis treats the income (both SS and non-SS) in constant dollar terms. Since tax brackets, the standard deduction, and exemptions are indexed to inflation, they need not be modified. But the SS thresholds are not indexed to inflation. Therefore to put them on a constant dollar basis it is necessary to reduce their nominal values by the inflation rate.
testing321
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by testing321 »

Did you file and suspend? If so, SS wants to know if you want the benefits that you forwent since you suspended in a lump sum or if you want only the higher annuity payments that you're otherwise entitled to. I'm expecting the same question in a few years and will take the higher monthly payments. Single individuals might be better off with the lump sum if they have a short life expectancy. The option to decide is one advantage of filing and suspending.
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Re: Social Security Question [Social Security Offering Lump Sum]

Post by JoeRetire »

testing321 wrote: Thu Sep 28, 2017 1:45 pm Did you file and suspend? If so, SS wants to know if you want the benefits that you forwent since you suspended in a lump sum or if you want only the higher annuity payments that you're otherwise entitled to. I'm expecting the same question in a few years and will take the higher monthly payments. Single individuals might be better off with the lump sum if they have a short life expectancy. The option to decide is one advantage of filing and suspending.
This is no longer possible since The Bipartisan Budget Act of 2015. You can no longer file and suspend then as for a lump sum back to the filing date.
You can get a lump sum of the past 6 months' worth, but no more.
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jhawktx
Posts: 442
Joined: Thu May 19, 2011 8:15 am

Re: Social Security Question

Post by jhawktx »

Ron wrote: Mon Sep 25, 2017 6:42 pm Short term gain; long term pain :twisted: ...

Since I turn 70 in January, I'll expect the call in the next few months. Now I have to come up with a "phone script" (like they read from) as a comeback to their proposal.

- Ron
Let me save you some time working up your phone script. Here it is in complete detail, "No thank you".
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