Welcome to Financial Advisor IQ

Time Running Out on File-and-Suspend Loophole

By R.A. Monroe March 1, 2016

Late last year Congress passed a budget bill which changed the way many Americans approaching retirement age can claim Social Security.

One major impact of the law is that it eliminates the Social Security claiming strategy known as file-and-suspend, which let married couples coordinate their claims to maximize benefits.

File-and-suspend allows, for instance, a wife or husband to receive spousal benefits while the other partner continues to reap delayed credits for working until age 70.

Also, if both spouses are retirement-age and working, one of them can file a “restricted application” to receive only spousal benefits. This lets them reap delayed credits for staying employed until age 70.

While that strategy will no longer be an option for future retirees, people who turn 66 on or before April 30, 2016, and have not yet claimed benefits have a narrow window during which they are still able to take advantage of these strategies – strategies which could add tens of thousands of dollars to retirement incomes over time.

Advisors with clients who could benefit from this strategy should consider reaching out to them.

The clock is ticking: The six-month grace period ends in two months.

“About 90 percent of people I’ve spoken to have no idea this is even happening,” says Willie Schuette, an advisor with the Avon, Ohio-based JL Smith Group, which manages $100 million.

That knowledge gap can work to an advisor’s advantage. By proactively reaching out to inform clients about the change, FAs can demonstrate their value as a financial professional.

Willie Schuette

“Reach out by several different means,” Schuette suggests. “Email articles to your client base or to prospects in the target age range. Set up individual meetings for your clients who are eligible but haven’t taken Social Security benefits yet.”

Schuette has taken this one step further by hosting education workshops in his local community.

These free workshops let him offer useful information while also making contact with prospective clients.

Use the deadline as a motivational tool

Jason Lina, a lead advisor with Atlanta, Ga.-based Resource Planning Group, which manages $230 million, sees a silver lining in these changes.

“There are obvious drawbacks for younger clients who lose some of these unique strategies but one positive result of the loophole closures is that advisors have some clients who stand to benefit dramatically from these strategies,” he says.

Lina advised clients to contact Social Security to start the file-and-suspend process early in the month of their 66th birthday so their spouse would receive higher benefits.

At least a few clients procrastinated doing so, even though it meant leaving money on the table.

But when Lina reminded them of the upcoming deadline, they were finally motivated to take action.

“I think the rule changes present advisors with a unique opportunity — a time deadline,” he says. “If you tell a client they need to update their wills they take months or years to do it. But if I tell a client that we have four months to make this Social Security election or forever lose the nice opportunity, they’re more likely to tackle it.”

Jason Lina

Adjust portfolios accordingly

The rule changes may necessitate a corresponding adjustment in clients’ retirement plans, says Rick Bender, an advisor with Rockford, Ill.-based Savant Capital Management, which manages $4.3 billion.

“Less money will come from Social Security than expected, meaning that more will have to come from the client’s portfolio, savings or part-time employment,” Bender says.

If clients had been counting on taking advantage of one of these filing strategies and are no longer eligible, their plan will need some adjustment.

Bender suggests meeting with clients to discuss how Social Security benefits factor into their overall retirement savings.

“If the new rules create a shortfall, where and how is that shortfall going to be offset?” he asks. “Will the portfolio sustain a higher withdrawal rate to offset the shortfall from Social Security?”

But rather than presenting this as negative news, advisors can use the opportunity to reconnect with clients in order to review their filing strategy and their overall retirement readiness.

To learn more about Social Security tactics for your clients, including file-and suspend, watch FAIQ Education: Social Security Strategies. This 60-minute webcast has been accredited for 1 CE credit hour by the CFP.