The Lump-Sum Social Security Option: Good for Your Clients?

The Lump-Sum Social Security Option: Good for Your Clients?

Clients consistently ask us when they should start taking their Social Security benefits.

Our response is habitual and agrees with the advice offered by most financial professionals: to maximize benefits, wait as long as you can.

Choosing when to retire is a personal matter – some people can’t wait to relax, while others positively fear leaving the stimulation of the workplace. In any case, benefits must by claimed starting at age 70. Despite the requirement, some wait a while before they claim their first payment. In these cases, the pension administrator will offer them a lump-sum payment to cover the arrears. The amount can total up to six months’ worth of payments, depending how long the claimant waited to apply.

Only people who’ve reached full retirement age can be offered a lump sum, so clients who retire early won’t face the decision. If this happens to a client, though, should they take the lump sum or refuse it? There are good reasons to accept, but as usual, there’s potential for financial harm.

For example, taking the lump sum can effectively reduce the client’s monthly benefit. It works like this: after retirement age, the benefit rises at a standard rate of .667%/month. If a six-month lump sum is taken, the future monthly benefit would be cut by 4% of the amount received by the claimant.

Rob Greenman, lead advisor at Vista Capital Partners, says it can be tough to advise the client on the right choice. Hindsight provides the only true answer, he says, a bit of wisdom that does little to help us. Instead of focusing on the ideal, understand the trade-offs, he counsels. “There’s a lot there – including what implications it has on the surviving spouse benefit if the client in question predeceases his spouse,” says Greenman.

At Gerber Kawasaki in California, COO Danilo Kawasaki says the key factor is longevity. If a client takes the lump sum from Social Security, it “rolls back the clock six months for when benefits are calculated,” he says. Given the impossibility of knowing when an individual will die, there’s no sure way to calculate whether accepting the lump sum makes sense or merely short changes the client.

A lump sum may be seductive for some clients, who can think of plenty of ways to employ it – travel, investment, paying off credit cards, what have you. Depending on circumstances, it can be the right thing to do – or most assuredly not.

Mark Wilson at Mile Wealth Management says the primary decision for clients should be when to retire, with a view to maximizing benefits. He warns: “Winging it leads to bad decisions that can cost the client tens of thousands of dollars over their lifetime.” When your client has chosen the most felicitous moment to retire, only then can the question of taking a lump sum or not be considered, he says.

Kawasaki says the decision should depend on what you plan to do with the money. Spending on lifestyle luxuries can usually be postponed, and in such cases, it should: taking the lump sum to finance a vacation makes little sense. Using the money to finance a promising investment, one that could handsomely pad a client’s retirement income, would be an entirely different matter, he says.

One analyst warns that taking a lump sum could damage the monthly benefit to the extent that it would take 10 to 12 years to recover. Unless one plans to die before that period expires, taking the money doesn’t make sense. It’s also good to recall that the lump sum is taxable and could easily bump a client into a higher bracket.

For more information, please read:
Should Clients Take a Lump-Sum Social Security Payment? | ThinkAdvisor

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