While most advisors would typically counsel their clients to delay collecting Social Security for as long as possible in order to maximize the eventual benefit level, even the most prepared clients can find themselves facing unanticipated challenges — and expenses — once they actually reach retirement.
Fortunately, the Social Security system provides a loophole that can allow clients who have delayed retirement to access their benefits even after the initial decision to defer has been made. However, the option exists only if the client has taken steps at the outset in order to preserve the right to retroactively claim benefits, and for all but the wealthiest clients, this advance planning can make all the difference in ensuring financial security in the face of changing circumstances.
Retroactive benefit claims
Much of the accumulation phase of retirement income planning is a guessing game: Your clients attempt to anticipate their needs during retirement but have no way of definitively knowing what those needs will be ahead of time. Retroactive Social Security benefit claims can help clients supplement their income in the face of unanticipated expenses.
Any client who has deferred collection of Social Security benefits past full retirement age is eligible to collect up to six months’ worth of retroactive benefits if the client changes his mind about deferring benefits (of course, those benefits will be reduced to the benefit level as it would have existed had the client not deferred the claim).
What most clients do not know, however, is that they could be eligible to claim all retroactive benefits that would have been paid had the initial receipt of benefits not been deferred. Despite this, taking advantage of this option requires that the client plan from the outset to preserve the right to claim those benefits.
In order to fully undo a client’s decision to delay Social Security benefits, the client must have used a strategy known as “file and suspend” (discussed in detail later), in which case the client is eligible to claim benefits retroactively for the entire period when benefits were suspended.
The client first files for benefits and suspends his claim, which then gives the client the right to claim retroactive benefits for any (or all) months during which benefits were not paid. This strategy is known as a reinstatement of suspended benefits and requires that the client visit his Social Security office in person to make the request.
File and suspend: the basics