Creative use of Social Security timing strategies can be key to securing comfort in retirement, and timing benefits so that your client can receive a lump sum payment during retirement can unlock many options for the older client. For those nearing retirement age, this seldom-discussed strategy can be just the Hail Mary play needed to ensure longevity protection throughout a long retirement. By delaying retirement for a few months, your clients can access the chunk of cash that can be fundamental to purchasing a product to protect them from the unexpected at a time when the client’s retirement needs have finally become a reality.
The Social Security lump sum strategy
Much of the accumulation phase of retirement income planning is a guessing game — your clients attempt to invest in products structured to meet their needs during retirement, but have no way of definitively knowing what those needs will be ahead of time. The Social Security lump sum strategy can give these clients access to the extra funds needed to purchase products that more accurately reflect reality at a time when they may not be ready to sell off current investments and are not yet required to take minimum distributions from traditional retirement accounts.
To be eligible for the lump sum payment, the client must first delay claiming Social Security retirement benefits for at least six months past the normal retirement age — currently 66 — but this figure will increase over time. Once the client ages past full retirement age, he is eligible to claim both retirement benefits and a lump sum payment.
The lump sum payment represents up to six months’ worth of retroactive benefits that were not paid between full retirement age and the date the client actually began claiming benefits. Note that retroactive benefits are only paid for time that elapses after full retirement age up until benefits are actually claimed — so that if the client claims benefits at age 66 and four months, he is only eligible for four months’ worth of retroactive benefits.
A simplified example can illustrate. Assume your client is eligible for a $2,400 monthly benefit if he begins claiming benefits at age 67 and six months, but waits until age 68 to actually begin claiming (when the monthly benefit has increased to $2,500). At this point, he can elect to take a lump sum payment equal to $14,400—or what the client would have been entitled to receive had he claimed benefits six months prior to the date of the actual claim.
The client can then take these funds and roll them over into a product that can meet his needs as they exist at the time—such as a deferred annuity that begins payouts when the client reaches age 80 or a product with a long-term care rider to fund care after an accident.
In the example, it is important to note that the lump sum payment is based on the client’s monthly benefit level as it existed at age 67 and six months — not the level of entitlement at age 68. This is because the retroactive benefit claim is designed to put the client in the same position as he or she would have been in had the claim been made six months earlier.
This means that, going forward, the client in the example will be treated as though the initial claim was made at age 67 and six months, so that the permanent monthly benefit is reduced from $2,500 to $2,400. As a result, the strategy is often recommended for clients who are in need of emergency funds or anticipate a shortened lifespan.
Further, the entire lump sum payment is taxable in the year it is received. The percentage of benefits that are taxed depends on the client’s total income for the year, so for clients who have other income sources — including amounts drawn from traditional retirement accounts — in the year that the lump sum is received may wish to consider pushing that income into a subsequent tax year, if possible.
The Social Security lump sum strategy can give older clients access to the funds they need to plan for contingencies arising late in life. Despite this, it is important to examine the potential pitfalls in order to evaluate the strategy’s effectiveness for each particular client.
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