Two important Social Security strategies have just been eliminated and advisors need to be up to speed on the change and more importantly, what it means for clients.
Congress recently passed a budget bill that included provisions to eliminate file and suspend and restricted application, which have been Social Security go-tos for many advisors, primarily for their married clients.
“This change came completely out of left field. It was totally unexpected and I think you’d be hard-pressed to find an advisor who thought this was imminent,” said David B. Mendels, CFP, a New York-based advisor and director of planning at Creative Financial Concepts LLC. For 15 years, Mendels has also taught a retirement planning course for certified financial planners (CFP) at New York University and he stays abreast of rumors and changes that can affect later-life financial strategies.
Though these were popular strategies, not all advisors were aware of the options. Mendels said that file and suspend was not in the CFP curriculum so he incorporated it into his teaching.
In a nutshell, file and suspend allowed a spouse to claim a spousal benefit as long as the main beneficiary claimed benefits first. The catch was that when the main beneficiary filed for benefits, he or she could immediately suspend receipt of the benefits. This meant the other spouse could claim the spousal benefit while allowing the main beneficiary’s retirement benefit to continue to grow at the eight percent annual rate. If both of the parties reached full retirement age, it also provided for the spouse’s own benefit to increase because of the delayed retirement credits if he/she elected to receive only the free spousal benefits by filing a restricted application.
The recent change was surprising not only for the elimination of these two options, but for the lack of notice. Under the new scenario:
- If an individual is born on or after January 1, 1954, they will not be able to utilize either strategy.
- Those born between May 2, 1950 and January 1, 1954 will lose the file-and-suspend option but will remain eligible for the restricted benefit.
- Someone born on or before May 1, 1950, must request a suspended benefit by April 30, 2016 to enable a spouse to receive a spousal benefit while the main beneficiary is under a file and suspend.
Mendels called the 180-day transition period (Nov. 1, 2015-April 30, 2016) and the grandfathering clause “very stingy and abrupt.”
“This form of implementation pulled the rug out from under many people. I think they should have allowed those who are age 50 and over to still utilize file and suspend,” he said. “If you aren’t age 50, then you’d have had some time to investigate other options without retirement being so imminent.”