Looking back on the Social Security rules changes that took effect in 2016, some financial advisers may think that it is no longer worth their time to focus on claiming strategies to boost their clients' retirement income. But rather than playing the role of the Grinch that Stole Christmas, Congress actually handed financial advisers a gift last year that will keep on giving for years to come.
The Bipartisan Budget Act of 2015 eliminated the use of the popular file and suspend strategy starting April 30, 2016, and phases out the ability of married couples and eligible divorced spouses to restrict their claim to spousal benefits depending on their birth date. As a result, figuring out the best Social Security claiming strategy to recommend to clients during the next few years may be even tougher.
“Social Security is still complicated and clients are still expecting expert advice from you,” Social Security Solutions, a research and training company that offers software for financial advisers and consumers to calculate optimum Social Security claiming strategies, stated in a recent whitepaper titled “You Can Still Get More for Your Clients.”
Social Security Timing, a competing software and training company, agrees that advisers can still grow their business by offering Social Security claiming advice. The company analyzed 2,500 sample reports of the lifetime amounts that married couples would receive if they claimed Social Security benefits as early as possible, as a many Americans still tend to do, compared to utilizing a strategy to maximize benefits.
Before the Bipartisan Budget Act, Social Security Timing found the average difference was about $150,000 in increased lifetime benefits. Under the new rules, the average difference was just under $115,000 — still a significant amount of additional income by maximizing benefits.
Life expectancy has become a driving factor in choosing an optimum claiming strategy, according to the Social Security Solution whitepaper. The new rules, which limit the ability to claim only spousal benefits at full retirement age to those who turned 62 by the end of 2015, shift the breakeven age for couples into the future. The breakeven age is how long one must survive to make it worthwhile to claim a larger benefit later.
The company offered the following case study of Ben and Kathy, a married couple, both age 61. They are too young to take advantage of either the file and suspend or spousal benefit claiming strategies. Ben plans to stop working at his full retirement age of 66. Kathy has not worked outside the home for enough years to qualify for Social Security benefits on her own record.
If Ben and Kathy had been born a few years earlier and were able to take advantage of the old rules for claiming benefits, the breakeven age for starting benefits at 70 rather than 66 was 82 years, 11 months. Because Ben and Kathy both come from long-lived families and believe they could live to age 90, a breakeven age of just under 83 years seems fined to them.
But the new rules change the situation for Ben and Kathy. Their new optimal strategy has a breakeven of age of 89 years, seven months — about seven years later. Because the total cumulative difference between the two strategies is only about $12,000, Ben and Kathy may decide that it's not worth waiting until age 70 to claim benefits.
Separately, I asked HealthView Services, a company that provides health care costs data and Social Security planning tools for financial advisers, to calculate the impact of the new claiming rules. I asked them to analyze the difference in lifetime benefits for a married couple, age 66, who could take advantage of both claiming strategies; a married couple, both age 62, where one spouse could claim only spousal benefits while their own retirement benefit continued to grow to the maximum amount at age 70; and a 60-year-old couple who could not take advantage of either claiming strategy.
The calculations assume that both spouses would live to their average life expectancy of 87 for the husband and 89 for the wife. Their Social Security benefits at full retirement age are based on the national average of $1,341 for the husband and $871 for the wife and assumes annual cost of living adjustments consistent with the Social Security trustees' projections.
The results: The net present value of the oldest couple's lifetime benefits, based on using both claiming strategies, were $647,095. That is more than $25,000 larger than the lifetime benefits of the second couple who could file a restricted claim for spousal benefits and nearly $95,000 more than the youngest couple who could not use either creative claiming strategy.
So for the next seven years, when the last eligible person who can file a restricted claim for spousal benefits turns 66 on Jan. 1, 2020, financial advisers can significantly increase their clients' retirement income security by recommending an appropriate Social Security claiming strategy.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.