"Those who delay Social Security benefits until
after their full
retirement age will have the option of taking a
retroactive lump-sum
payment. The lump-sum option can make sense for a retiree who is
struggling to make ends meet, but the decision will reduce
future benefits and potentially increase the recipient's tax bill." (
Retirement Security SmartBrief, 1/22/20.
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 should retirees do 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?
Although this lump sum may be a tempting choice for retirees in financial need,
it may not be the right one. The six-month, one-time lump sum offer is only
available to those who have reached FRA. The lump sum retroactively
resets the benefit amount
to the lower benefit of 6 months earlier.
“The answer depends. The main factor is expected longevity.
By opting to take the lump-sum
option, one rolls back the clock six months for when benefits are calculated.
Depending on anticipated longevity (see links in this blog to online
calculators) one needs to determine the breakeven point for that to make
sense,” he explains. A retroactive lump sum reduces the monthly benefit with a
10- to 12-year catch-up period,
so generally it is not prudent if you think you will live another 10-12 years.
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.
“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,”
Taking a lump sum sets the start date back to an earlier age and therefore
all future benefit checks will
be reduced. However, if one has been diagnosed with a life-shortening disease,
taking a lump sum may be the best choice.
According to financial planning analyst C.J. Miller, “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. 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
that delay benefits do it for a reason, and the lump sum eliminates that.”
https://www.thinkadvisor.com/2020/01/10/should-clients-take-a-lump-sum-social-security-payment/
