Don’t let clients miss out on back Social Security benefits
John Brenkovich's client wished he had known his options.
The retired interior designer had claimed his Social Security benefits at 67, one year after reaching his full retirement age. No one explained to him that he was eligible for a lump-sum payment for six months' worth of back benefits, which he eagerly would have taken even if it meant a reduced monthly benefit for the rest of his life.
When he went to the Social Security office, he was merely told that he was eligible for a $2,600 monthly benefit, which he claimed and soon started receiving.
Eleven months of Social Security payments later, Brenkovich's client learned of the lump sum option.
“Why didn't you take the age 66-and-a-half payment but get six months retroactive?” Brenkovich, a CFP and the principal of Brenkovich Financial Management in Mamaroneck, N.Y., asked the retiree.
Brenkovich explained that people who apply for Social Security benefits after their full retirement age can claim back benefits up to six months.
To do that, though, they need to backdate the effective date of their Social Security application and have their monthly benefit readjusted to a lower amount.
“I wasn't even aware of that,” the client said.
Had Brenkovich’s client claimed his back benefits at 67, he would have backdated his application by six months to when he was 66 and a half. His monthly benefit would have been $2,500 -- or $100 less -- but he would be able to receive a lump sum payment of $15,000 ($2,500 x 6 months).
“The client wanted the cash,” Brenkovich says, adding that he was willing to accept a lower monthly benefit. “He liked having the lump sum now.”
Brenkovich told his client that if he lived more than 12 years and three months, the lump sum payment wouldn’t be worth it.
“Even if I live well beyond that, to me it's worth it because I'd like to have the $15,000 now,” the client said, noting that the $100 extra a month would, in fact, be less after taxes.
Brenkovich devised a plan to help his client get his back benefits. He proposed that his client request a withdrawal of application, tapping an obscure Social Security provision that allows individuals to pay back their benefits if they change their minds within 12 months of filing.
“Let's go back there together and say that you weren't offered the six-month retroactive and had you been offered that you would have taken it,” Brenkovich suggested to his client.
The client gladly accepted the offer. The two went to the Social Security office to put in the request, setting off a five-month battle to get the funds.
Even though they were initially told that their request was approved, it took an additional two office visits and three conference calls to release the lump sum payment.
“They kept telling you different things,” Brenkovich says.
“The Social Security office was very confused,” he says. “In fact, they were so confused it took them five months to do it.”
Because Brenkovich's client had been receiving a $2,600 Social Security check for 11 months, a total of $1,100 was subtracted from the $15,000 lump-sum payment, which Brenkovich had told him about.
The client was elated when he looked online and saw that the lump sum had finally been direct deposited into his account, Brenkovich says.
After a five-month wait, the client was beginning to wonder whether he would ever receive the money.
The client was very upset that the Social Security office hadn’t given him that option in the first place.
In reality, the client had three options.
He could have claimed his benefit as he originally did at 67, a move that would give him $2,600 a month for life. The client could also have delayed claiming his benefit until he was 70, at which point his monthly benefit would be $3,224.
Or, he could have gotten a lump sum payment and taken a lower monthly benefit.
“The Social Security officers in those field units don't give you those choices. They just say, ‘This is what you get today, and that's it,’” Brenkovich says.
He tries to lay out all clients’ options, so that “they’re equipped with all the knowledge to make the most informed choice possible,” he says.
“A lot of times people make these decisions like Mr. Spock. They make it purely from a numerical standpoint,” Brenkovich says.
“A lot of these decisions have emotion and sensitivity built into it, and that doesn't mean that just because you put emotion or subjectivity in a decision that it by default is illogical,” he says.
Brenkovich’s client, for example, may have needed the cash for a project or home improvement, money that he didn't have to pull from other sources.
“For him, it’s working capital that he could have put to use for something,” Brenkovich says.
Margarida Correia is associate editor of Bank Investment Consultant.
This story is part of a 30-30 series on tools and strategies for retirement. It was originally published on June 2.