Advice from many experts today is that people should delay claiming their Social Security benefits for as long as possible, or until age 70, when they have to claim them. But what do advisors tell clients who have delayed taking Social Security even after reaching full retirement age (FRA), and when they make the claim, the government offers them a lump-sum retroactive payment up to six months? Should they take it or not, and what’s the downside, if there is one?
We asked several financial advisors via email how they would advise clients on this choice. Keep in mind that the six-month, one-time lump sum offer isn’t available to those who haven’t reached FRA. Also, the lump sum retroactively resets the benefit amount. For example, after full retirement age, the Social Security benefit is increased by 2/3 of 1%, or .667% per month, and if the lump sum is taken, the monthly Social security payment would be set back by 4% of that payout.
“With the benefit of hindsight after the client is long gone, the ‘right’ answer could be identified,” said Rob Greenman, partner and lead advisor with Vista Capital Partners in Portland, Oregon. “Since that’s not possible — it’s more about understanding the trade-offs. There’s a lot there — including what implications it has on the surviving spouse benefit if the client in question predeceases his spouse.”
Danilo Kawasaki, vice president and chief operating officer of Gerber Kawasaki in Santa Monica, California, agrees. “The answer really depends on a few factors. The main one being longevity. By opting to take the lump-sum option, one rolls back the clock six months for when benefits are calculated. Depending on longevity factors (which are hard to predict) one needs to determine the breakeven point for that to make sense,” he explains.
Although this lump sum may be a tempting choice for clients in need, it isn’t always the right one.
“Most folks are not running numbers on the ‘best’ age(s) to draw their Social Security benefit(s). Winging it leads to bad decisions that can cost the client(s) tens of thousands of dollars over their lifetime,” says Mark Wilson, whose firm is Mile Wealth Management in Irvine, California. “Once you run the numbers and make a decision about when is a great time to begin [Social Security] benefits, then we can answer the question about taking the lump sum offer.
“For example, assume George and Linda have decided (based on their specific situation) to delay George’s Social Security until he turns 70, but draw Linda’s at 66. If Linda were 66 1/2 today, I would encourage her to make an appointment, apply to begin her retirement benefits and ask for her retroactive lump sum (effectively starting her benefit at 66). If Linda’s ‘best’ retirement age is instead 68, I would recommend she make an appointment just before her birthdate (in 1 1/2 years) and not take the lump sum offer. I’d also recommend George not take the offer when he starts his benefit.”