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The Social Security Lump Sum Strategy: Don’t Bother

Reminder: Today at 3pm EST, I’ll be participating in a WSJ webcast about creating an action plan for tapping investments and Social Security in retirement. Questions from viewers are very welcome, so please join us. (For anybody who is interested but who cannot make it at the scheduled time, a recorded version of the webcast will be available at the same URL afterward.)

A reader recently asked me about an article in ThinkAdvisor in which the authors suggest that advisors recommend a “lump-sum” Social Security strategy to their clients. The article states:

“For those nearing retirement age, this seldom-discussed strategy can be just the Hail Mary play needed to ensure longevity protection throughout a long retirement. By delaying retirement for a few months, your clients can access the chunk of cash that can be fundamental to purchasing a product to protect them from the unexpected at a time when the client’s retirement needs have finally become a reality.”

As a bit of background: When you file for benefits (whether retirement benefits, spousal benefits, or widow/widower benefits), you can essentially backdate your application by up to 6 months. That is, you can request that the SSA pay you up to 6 months of benefits as a lump sum and treat you going forward as if you had filed 6 months earlier than you really did. (The backdating cannot, however, be applied to any month prior to full retirement age.)

The “lump-sum strategy” discussed in the article consists of:

  • Waiting at least 6 months beyond full retirement age to claim benefits, then
  • Filing a claim that includes a request for retroactive benefits paid as a lump sum, then
  • Using the lump-sum to purchase some sort of longevity insurance (e.g., a deferred lifetime annuity).

So for example, a person with an FRA of 66 following the strategy could wait until age 66 and 6 months to file for retirement benefits. Then he would file for his retirement benefit and request a lump sum payment for the months between his FRA and his current age. And he would then be treated as if he had originally filed at his FRA.

In other words, the strategy consists of holding off on receiving 6 months of benefits, only to receive the exact same amount later as a lump-sum. The only effect on you as an investor (relative to just claiming at full retirement age) is that you lose out on a few months of interest that you could have earned if you’d just taken the money earlier in the first place.

So what’s the point of the strategy? It gives you a lump-sum of cash, with which you can purchase a product from the advisor.

Summary: It’s not really a Social Security strategy. It’s a sales strategy.

Addendum: There can be cases in which it makes perfect sense to backdate a Social Security claim — if you’re filing because you just learned about a medical condition that gives you a significantly shorter life expectancy than you had previously thought, for instance. But planning ahead of time to backdate a claim would not usually make sense. It’s generally better to just claim earlier in the first place.

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Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

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"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
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