Social Security’s Lump-Sum Payment Option
Thursday, July 3, 2014

The Social Security Administration offers the chance to receive a lump-sum payment of up to six months’ worth of benefits. It’s not a well-known option, but it is available to anyone meeting the basic requirements. There are also caveats to consider.

Retroactive benefits can be claimed by a person who has reached full retirement age (FRA) and is not currently collecting benefits. FRA is currently 66 for those born between 1943 and 1954. It increases in two-month increments for those born between 1955 and 1959. Those born in 1960 or later will not reach full retirement age until they turn 67.

Full retirement age is the year at which a person first becomes eligible for the primary insurance amount. Social Security benefits can be claimed prior to the FRA, but they will be below the primary insurance amount. Conversely, if claiming is postponed, delayed retirement credits increase the benefits until age 70. The increase in benefits is why conventional wisdom calls for delaying the claiming decision until as close as possible to age 70 for those in good health.

After person reaches FRA, he or she can apply for retroactive benefits. The Social Security Administration explains, “You are entitled to benefits beginning the first month in the retroactive period that you meet all requirements (except for the filing of an application) for entitlement. For example, suppose you reach FRA in March 2008 and you are fully insured. You do not file an application for retirement insurance benefits until March 2009. In this case, you may be entitled retroactively beginning with the month of September 2008 (six months before you filed an application).”

You cannot apply for retroactive benefits prior to the attainment of FRA if it “results in a permanent reduction of the monthly benefit amount.” An exception exists for someone who is a surviving spouse or surviving divorced spouse under a disability, and is not yet age 61 in the month of filing.

The lump-sum payment does not come without a penalty, however. The basis for current and future benefits will be based on the earliest date of the period you are requesting retroactive benefits for. This could make the difference of having your benefits based on you being aged 68-1/2 instead of 69, for instance. Furthermore, the lump-sum payment is taxable in the year that it is received. Depending on the size of the lump-sum payment and your other income, you could have 85% of your Social Security benefits taxed instead of 50%.

The lump-sum payment is one of the many options available for claiming Social Security. Before making a claiming decision, think through all of your options to ensure you are making the best one for your situation. If you are unsure, contact a professional who is well-versed in Social Security strategies (not all financial advisers are) for guidance and a second opinion.

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The Week Ahead

(As a reminder, the U.S. financial markets will be closed tomorrow in observance of Independence Day.)

Five members of the S&P 500 will report earnings as the second-quarter earnings season officially starts: Alcoa (AA) on Tuesday; Fastenal Company (FAST), The Progressive Corporation (PGR) and Family Dollar Stores (FDO) on Thursday; and Wells Fargo & Co (WFC) on Friday.

The only economic report of note will be Wednesday’s release of the minutes from the June Federal Open Market Committee meeting.

The Treasury Department will auction $27 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year notes on Thursday

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AAII Sentiment Survey

Optimism among individual investors about the short-term direction of stock prices is at a three-week high, according to the latest AAII Sentiment Survey. Pessimism also rose slightly, while neutral sentiment extended its streak of above-average readings.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.3 percentage points to 38.5%. Even with the improvement, optimism remains below its historical average of 39.0% for the 14th time in the past 16 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 2.6 percentage points to 39.1%. This is the 26th consecutive week that neutral sentiment is above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.3 percentage points to 22.4%. This is the 11th straight week and the 34th out of the last 38 weeks with pessimism below its historical average of 30.5%.

The slight increase in pessimism follows what was a six-month low in bearish sentiment. Neutral sentiment remains at high levels, though it is now just below the upper border of what we would we consider to be an unusually high reading (39.4%). Keeping some AAII members optimistic is sustained economic growth, the market's upward trend, and the Federal Reserve's tapering of bond purchases. Discouraging some AAII members is the pace of economic growth, prevailing valuations, events in Iraq and Ukraine, and frustration with Washington politics.

This week’s special question asked AAII members about the one thing they would change about the current market environment if they had a magic wand to do so. Responses were varied, though they primarily fell into one of four categories. The largest number of respondents (18%) said they would alter monetary policy or raise interest rates. This group also includes respondents who want to know how the Federal Reserve intends to end monetary stimulus. The second-largest group (17%) said they would alter Washington politics. These changes include the politicians themselves, regulations or the tax code. About 14% would change the market environment. Some would reduce current valuations, while others said they would end high-frequency trading or dark pools. Changing the pace of economic growth came in fourth, with about 9% of respondents saying they would accelerate it.

Here is a sampling of the responses:

  • “Speaking selfishly, stock prices should come down to earth.”
  • “Get better clarity from the Fed on how they are going to unwind quantitative easing.”
  • “I’d stop the high-frequency trading.”
  • “Continued improvement in real job growth.”
  • “Have the Fed raise interest rates sooner.”

This week’s Sentiment Survey results:

Bullish: 38.5%, up 1.3 points
Neutral: 39.1%, down 2.6 points
Bearish: 22.4%, up 1.3 points

Historical averages:

Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%

Take the Sentiment Survey.
AAII Asset Allocation Survey

Individual investors’ fixed-income allocations rose to a four-month high last month, according to the June AAII Asset Allocation Survey. Equity allocations rose as well, while cash allocations pulled back.

Stock and stock fund allocations rebounded by 1.7 percentage points to 67.0%. This is the 15th consecutive month and the 17th out of the past 18 months with equity allocations above their historical average of 60%.

Bond and bond fund allocations rose 0.5 percentage points to 16.0%, the largest allocation since February 2014. The increase puts fixed-income allocations at their historical average of 16%.

Cash allocations fell 2.1 percentage points to 17.1%. The decline follows May’s eight-month high for cash allocations. June’s decline puts cash allocations below their historical average of 24% for the 31st consecutive month.

Both equity and bond allocations have been fairly stable during the first six months of the year. Since January 2014, stock and stock fund allocations have fluctuated within a 1.9-percentage-point range, while bond and bond fund allocations have fluctuated within a 1.5-percentage-point range. The lack of a big change in allocations is not surprising given the trend we’ve been seeing in the AAII Sentiment Survey and the decline in bond yields. Neutral sentiment toward the direction of stock prices has been above its historical average of 30.5% for 25 consecutive weeks. Yields on the 10-year Treasury note have been trending downward throughout the year and ended June near a 12-month low. While individual investors are neither signaling optimism nor pessimism about the six-month direction of stock prices, prevailing low yields are not making bonds and cash attractive alternatives.

This month’s special question asked AAII members what they are doing to get portfolio income. More than half (53%) said they are holding dividend-paying stocks. Nearly a quarter (23%) said they are using bonds or bond funds for income purposes. Several of these respondents said they are using bond ladders. Approximately 7% realize income from REITs and a nearly even number are using master limited partnerships (MLPs). A sizeable portion (13%) of respondents said they are not doing anything. Many of these members are either still employed or receive pension income.

June Asset Allocation Survey results:

Stocks and Stock Funds: 67.0%, up 1.7 percentage points
Bonds and Bond Funds: 16.0%, up 0.5 percentage points
Cash: 17.1%, down 2.1 percentage points

June Asset Allocation Survey details:

Stock Funds: 32.4%, up 2.2 percentage points
Stocks: 34.6%, down 0.5 percentage points
Bond Funds: 12.8%, up 1.0 percentage points
Bonds: 3.2%, down 0.5 percentage points

Take the Asset Allocation Survey.


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