Beware of Social Security Agents Bearing Lump-Sum Offers

Late last year, I talked to three different financial advisors and their clients. All three clients said they had been surprised when they called Social Security to put in their claim. They were offered some “bonus” money. Really?

The Client’s Situation

I asked each client about their phone conversation, and all three had the same story.

About three months before their 70th birthday, they called Social Security to claim their benefits. They had been working with their financial advisor and planned to claim maximum benefits at 70.

• Each man was married and had been the higher earner.
• They understood the value of the 8% per year delayed retirement credits.
• Providing the highest surviving spouse benefit was a key driver to waiting.

An Enticing Offer

During the call with the SSA agent, they received an intriguing offer. The agent explained how the client did not need to wait until age 70 to place his claim. Instead, he could claim now and get a six-month, retroactive, lump-sum payment.

Quite an enticing offer to any retiree who had been waiting nearly four years to get his maximum Social Security payments.

Here was a new option to consider: He could receive a large lump-sum payment now, and his monthly benefits would still begin the month he turned 70. Tempting idea. What did these three retirees decide to do?

The Decision and the Rationale

Much to my surprise, each of the retired husbands took the cash offer. Despite waiting almost four years to get their maximum benefit, they couldn’t pass up the tempting offer of a lump-sum cash payment of around $25,000.

Asking why they didn’t wait to cross the finish line at 70, the answers weren’t particularly compelling:

• “They offered, and it was a big amount.”
• “It’s my money, and I could get over $24,000 upfront.”
• “I’d rather have it than leave it in Social Security.”

Effects on Monthly Payments

I asked whether the agent explained the full situation: Their monthly benefits would be permanently reduced. Dropping from the 32% planned increase to 28% for monthly payments.

The clients thought they remembered something about that, but they really liked the idea of getting a big check. And it didn’t seem like much of a difference in their monthly payments.

But is it a big difference?

Well, it’s a matter of degree and each client’s unique situation. And, how important is the maximum payment in their overall retirement income plan?

Putting together a simple model:

• Assume a client had a $3,000 primary insurance amount at age 66.
• The age 70 estimate is $4,620, including delayed retirement credits and cost-of-living adjustments.
• By effectively claiming six months earlier, his benefit drops $335 per month to $4,285.

This may not seem like a big deal to some clients. Apparently, the offer of $25,000, more or less, is just too good to pass up.

Connecting Some Key Dots

Regardless of all the planning and advice from an advisor, a client is always in charge of their Social Security claiming decision. You know that the plan has a higher degree of success when maximizing Social Security at 70. But that is only on paper.

Clients aren’t connecting the dots. And, unfortunately, that decrease in Social Security benefits can add up:

• The lump sum could bump a client into a higher tax bracket the year it is received.
• This decision may increase his Medicare Part B premium in two years because of higher income.
• That additional $335 in income would have paid for the base Medicare Part B premiums ($164.90 in 2023) and some IRMAA, if applicable.
• Annual COLAs will now be applied to a significantly smaller base benefit amount. Overall, he’ll collect less in benefits, potentially shortchanging household income by some $140,000 if he lives to 94.
• Most importantly, if he dies before his wife, she will not receive the maximum amount as a surviving spouse.

None of these clients invested their found money. It was theirs, and they spent it. They had no regrets. But perhaps they should.

Your clients may be tempted to take their money and run. It’s best to rerun their retirement income plan to evaluate the effects of an unplanned, smaller benefit amount. Then give them a heads up about the decision they’ll face when they call Social Security to put in their application.

Marcia Mantell is the founder and president of Mantell Retirement Consulting Inc., a retirement business and education company supporting the financial services industry, advisors and their clients. She is author of “What’s the Deal with Retirement Planning for Women?,” “What’s the Deal with Social Security for Women?,” “Cookin’ Up Your Retirement Plan,” and blogs at BoomerRetirementBriefs.com.