Recent changes to Social Security can have a big impact on two-income couples. This marks a pivotal moment for advisors, who can help their clients navigate the amendments that otherwise could significantly hurt their benefits, according to experts.
New federal rules this year dramatically altered the strategies two-income couples may deploy to maximize Social Security spousal benefits. Among the most significant changes in the federal Bipartisan Budget Act of 2015 was the elimination of the file-and-suspend strategy.
Griffin Geisler, manager of RBC Wealth Management’s Internal Wealth Center division, providing resources for the firm's 1,900 advisors, says clients may want to readjust their financial plans to compensate for the strategy's loss. And this is where advisors can play a vital role.
“Everybody’s situation is a little different,” Geisler says.
OLD VS. NEW
Under the old rules, when a spouse reached full retirement age, typically 66, he or she could file for Social Security benefit eligibility. By doing so, the other spouse could start receiving spousal benefits equal to 50% of the applying spouse’s retirement benefit. At the same time, the spouse who applied for eligibility could choose the option of suspending his or her own benefits, receiving an additional 8 % growth in benefits for each year before reaching age 70.
Under the new rules, which go into effect April 30, 2016, suspension of benefits will no longer be permitted.
At a minimum, Geisler says advisors may want to warn clients who will have reached retirement age by next April to evaluate if they want to file and suspend before they lose the opportunity to do so. He estimates dual-income married couples, who were contemplating the file-and-suspend option, could lose as much as $60,000 in benefits over a four-year-period as a result of the strategy's suspension.
AVOIDING THE PAIN
Stephen Hart an advisor with Talis Advisors of Plano, Texas, says there's enough time for some clients and their advisors to adjust their retirement planning and reduce the impact of losing the file-and-suspend option.
“Squeezing a little extra out of social security is just one tactic,” Hart says. “The biggest group that will be affected [by the new changes] are those in their mid-late 50s. The good news is that most still have 10 or more years to account for the changes.”
Advisors, however, may find helping one demographic group a bit more challenging, says Steve Doster, an advisor with Rowling & Associates in San Diego, Calif. Doster says the timing for the file-and-suspend option's loss could unfairly impact same-sex married couples residing in states that, until recently, banned their unions.
To qualify for spousal benefits, a couple has to have been married for at least one year. But same-sex couples residing in states that had laws barring same-sex marriages never had the option to get married until the U.S. Supreme Court ruled in June that such bans were unconstitutional.
Therefore, those couples won't be celebrating one-year wedding anniversaries until after April 30, 2016, when file and suspend will no longer be allowed.
“They will never have had the opportunity to file and suspend,” says Doster.
RBC’s Geisler does note one upside for financial advisors as a result of the new rules. Because they create even more challenges than before for people who need to figure out how and when to apply for benefits, more existing and prospective clients will turn to financial advisors for help.
“Our phones keep ringing,” Geisler says, adding that he is not surprised. “People really need someone to help them navigate."
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