In April, the Social Security Administration will begin increasing monthly benefit payments to more than 3.2 million people affected by the repeal of the Windfall Elimination Provision and Government Pension Offset under the Social Security Fairness Act.
“The impact could be huge,” said George Pikounis, financial advisor at Burns Estate Planning in Tallahassee, Florida, in an email.
“For many, inflation has driven the cost of living up by 30%,” he added. “The extra Social Security money is a big chunk of change that can help stabilize people who are struggling.”
While the increased payments are welcome news for retirees, they bring financial planning considerations such as tax and investment strategies.
Here’s what to know ahead of April’s lump-sum back payment and benefit increase.
[Read: This Is How Trump’s Social Security Layoffs Could Affect Your Benefits]
Who Will Receive Higher Social Security Benefits?
Recipients include public sector employees such as teachers, firefighters and police officers in some states, as well as some federal workers.
Many of these jobs weren’t covered by Social Security, which resulted in reduced benefits under WEP and GPO. The repeal means they will now receive full Social Security benefits.
Those set to receive the additional benefit will be notified by mail or can log in to their My Social Security account online.
How Could Retroactive Payments Help Retirees?
According to the Social Security Administration, the average retroactive payment is about $6,710.
“For many retirees, this lump-sum back payment and the bump in monthly income come at a critical time, as everyday costs remain high,” said Paul Horn, director of financial planning at Benefit Financial Services Group in Irvine, California, in an email.
Retirees should make the most of the higher monthly benefit, according to Horn.
“For instance, you can reassess your monthly budget now that your Social Security check will be larger,” Horn said.
Those extra dollars can ease month-to-month cash flow pressures, such as rising costs of food, gas and utilities. People receiving these new Social Security payments have an opportunity to shore up their retirement finances, said Andrew Latham, a certified financial planner and content director at SuperMoney, in an email.
This could reduce the money retirees must draw down from savings or investments each month.
“Overall, use this increase to restore financial balance in your life,” Horn said. “After years of tighter budgets under WEP and GPO reductions, you can now breathe a bit easier knowing you’ll have a more adequate Social Security income to count on.”
The additional funds can also help retirees pad savings in an uncertain economic climate. “Bolster your emergency fund. Aim for at least three to six months of expenses in cash and invest it in a high-yield savings account,” he said. “If debt is weighing you down, knock out high-interest loans to free up future cash flow.”
Once those bases are covered, Latham suggested investing in low-cost index funds for long-term growth.
“If health care is a concern, funding a health savings account or securing long-term care insurance can provide peace of mind,” he said.
[Read: Trump Proposed Eliminating Social Security Taxes. Here’s the Bill That Could Make It Happen]
Retirees Should Consider the Tax Implications of Higher Social Security Benefits
Any new influx of retirement income, including Social Security benefit payments, comes with tax considerations. “For those who are eligible to receive retroactive Social Security payments, it is critical (to) evaluate the potential tax implications, especially since retroactive payments are considered taxable income,” said Steve Sexton, retirement planning expert at Sexton Advisory Group in Temecula, California, in an email.
By strategically managing their use of the funds, retirees can optimize their overall tax burden while reserving other assets for long-term growth.
“Use the money to offset taxable retirement account withdrawals,” Pikounis said.
For example, once a retiree takes an extra $500 from an individual retirement account, that money is no longer available for growth. If it’s withdrawn from a traditional IRA, it’s also considered taxable income.
“By using the extra Social Security money to pay for your expenses, you’re not only keeping your retirement account healthier, but you’re potentially saving money in taxes as well, which is literally money in your wallet,” Pikounis said.
Meet With a Financial Advisor
Thorough retirement planning should include a complete Social Security benefit analysis by an advisor. The goal is to understand factors such as how your Social Security fits with other sources of income, tax ramifications of retirement account withdrawal strategies and the best age to begin claiming Social Security benefits.
For those nearing retirement age, retroactive payments can influence when it makes sense to claim and maximize Social Security benefits, Sexton says.
Those receiving benefit increases who already have a solid plan may not need to make significant changes.
“I don’t think a (retiree) should adjust their planning except adding to their emergency fund,” said Chuck Czajka, CEO at Macro Money Concepts in Stuart, Florida, in an email.
“Even in retirement, a client should try to save 15% of their gross retirement income until they have 50% of it in liquid assets, then they can invest, take vacations or help the grandkids,” Czajka added.
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Are You One of the 3.2 Million Americans Getting Higher Social Security Benefits Starting in April? originally appeared on usnews.com
Update 03/19/25: This story was published at an earlier date and has been updated with new information.
