How to Deal With an Aging Advisor Force and Aging Clients

“The answer really depends on a few factors,” says Danilo Kawasaki, vice president and chief operating officer of Gerber Kawasaki in Santa Monica, California. “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 … 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 1.5 years) and not take the lump sum offer. I’d also recommend George not take the offer when he starts his benefit.”

Spending Ideas

Plans for the lump sum also make a difference, Kawasaki adds. “If you are using it to buy a boat because you can’t wait six months for it, then it doesn’t make sense. If you are using it to make an investment that can grow over time, then that could work in your favor. One last consideration is if you are married and your spouse is much younger than you with a lower Social Security benefit amount, you may not want to lock in a lower social security benefit over both lives.”

Also, “a retroactive lump sum reduces the monthly benefit with a 10- to 12-year catch-up period, so generally [it’s] not prudent if you think you will live another 10-12 years,” says David “Trey” Bizé of Oklahoma City, Oklahoma.

“However, if you have bills, debt or having trouble making ends meet and the choice is retroactive lump sum or retirement account withdrawal, the retroactive lump sum may be better, even in the long run, because the retroactive lump sum creates less income tax than the retirement account withdrawal. The retirement account withdrawal is taxed dollar-for-dollar, and the retroactive lump sum is taxed at most $0.85 on the dollar, possibly $0.50 on the dollar or maybe even tax-free depending on the family’s other taxable income,” he says.

Death and Taxes

John R. “Dick” Power, principal of Power Plans in Wapole, Massachusetts, agrees that it depends on the circumstances, but adds, “Remember that taking a lump sum sets the start date back to an earlier age and therefore discounts all future benefit checks. So if one can anticipate a long life, perhaps an inflation-indexed annuity is the best choice.”

Yet there are those who reject the idea of taking a lump sum. Says C.J. Miller, financial planning analyst with Sensible Money in Scottsdale, Arizona, “It is almost never in the best interest of the client to take the lump sum. The payment eliminates the monthly benefit increase gained by delaying in the first place, which is usually 8% a year,” he says.

“Additionally, taking the lump sum is a taxable event. Many people that elect the lump sum end up paying a higher tax rate and getting less for the benefit than they would have if they had claimed earlier. Most people who delay benefits do it for a reason, and the lump sum eliminates that. It’s in the government’s best interest to push for the lump sum option, not the average claimant’s.”

ThinkAdvisor.com Senior Writer Bernice Napach can be reached at [email protected]. Ginger Szala is executive managing editor of Investment Advisor. She can be reached at [email protected].