Page 42 - Investment Advisor January/February 2022

Conclusions

RETIREMENT PLANNING
Marcia Mantell and Ginger Szala

The Hidden Hazards of Taking a Social

Security Lump Sum

In her Connecting the Dots column, Marcia Mantell writes about the problems a
client’s plan to work six months after full retirement age could potentially cause.

a six-month retroactive payment as a
lump sum.
However, what the agents often miss
is explaining the consequences of the
lump sum: Your client’s benefit amount
gets recalculated back six months. And,
the ongoing monthly payments will not
include the full DRCs as expected.
In Jerry’s case, the agent was techni-
cally correct. If he claims in January
at his FRA, he would get $3,000 per
month (as an example). If he claims in
July, Jerry can choose a lump-sum ret-
roactive payment and reset his ongoing
monthly payments as if he had claimed
n advisor called me with a ques- the same. How can that be? in January. So, $3,000 per month.
tion from a client. The client, While we often talk about DRCs as
A “Jerry,” called Social Security getting a boost of 8% per year up to age WHAT’S THE HARM IN THAT
to explore his claiming options. Jerry 70, the calculation is applied monthly. STRATEGY?
reaches full retirement age (FRA) in Waiting six months should permanently There are several consequences to consid-
January. He wanted information about boost Jerry’s monthly payment by 4%. er, including the three below, and Jerry’s
when to claim since he will work until Why would the Social Security agent looking to his advisor to connect the dots.
the end of June. He doesn’t need the tell him he would get the exact same
money but wonders if he should tap his payment? Does Jerry need to claim a full For one, a potentially higher tax payment.
benefit at FRA or wait to receive some year after FRA to “turn on DRCs?” Social Security benefits are taxable for
delayed retirement credits (DRCs). many clients. Because Jerry is work-
Jerry was confused after the conver- NUANCES OF CLAIMING AFTER FRA ing through June, his income will like-
sation with the Social Security agent There are advantages to claiming at or ly exceed the threshold for combined
and relayed his conversation to his after FRA. There are also technical and income of $44,000 for those married
financial advisor. The agent told Jerry often misunderstood rules that apply. filing jointly.
it didn’t matter when he claimed — One of the lesser-known rules is when a Therefore, he may owe more in taxes
either in January or July. With either client claims after FRA, Social Security if he takes the lump sum payout than if
claiming date, Jerry’s payments will be will let them know they can get up to he collects benefits for only half the year.

40 INVESTMENT ADVISOR JANUARY/FEBRUARY 2022 | ThinkAdvisor.com