Social Security secrets for advisers

Most financial advisers are unaware of Social Security strategies that could help increase their clients’ benefits by thousands of dollars a year — and bolster their practices at the same time.

“Financial planners and advisers are leaving lots of money on the table for their clients because they don’t know about these strategies for Social Security,” said Larry Kotlikoff, an economics professor at Boston University. “At some level, not doing it is a disservice to their clients.”

There are several key Social Security tactics that advisers should consider, experts said. And now is the time to lock in benefits, as many predict that the laws related to Social Security will change in the near future.

“People have to start thinking about Social Security as an asset,” said Dean Barber, a founder and president of Barber Financial Group, which manages $700 million in assets.

“It’s extremely complicated, and most advisers don’t think of someone’s Social Security as an asset. That’s a huge mistake,” Mr. Barber said.

One of the strategies that few advisers know about is called a Social Security “do-over.”

This occurs when an individual who began collecting Social Security benefits at 62 decides to defer any further payments until 70. That increases the payments at 70 by as much as $1,000 month.

Do-overs require clients to pay back any Social Security income that they have received.

In some cases, clients could owe eight years’ worth of Social Security, so it is important that they hold on to their tax records, said Bradley R. Teets, an adviser with Kovack Securities Inc. But there aren’t any penalties or interest when paying back benefits.

Those clients who have paid income tax on their Social Security will likely be entitled to either a tax credit or a tax deduction, depending on the situation, experts said.

A big downside to this strategy is that if both spouses die shortly after paying back their benefits, the money paid into Social Security is gone. If a husband pays back the money collected and dies, his wife still gets the higher benefit.

For couples in which one person is the breadwinner, another little-known strategy is called “file and suspend.” For example, a husband files for his benefits, and his wife files for the spousal benefits.

The husband then requests a suspension of his benefits, but the wife continues to get the spousal benefits. The husband’s benefit continues to grow until he chooses to begin taking payments.

Ted Sarenski, president and chief executive of Blue Ocean Strategic Capital LLC, a registered investment advisory firm that manages $120 million in assets, said that one of his clients is considering implementing this strategy when he turns 66 this year. His Social Security payments will grow 8% annually until he turns 70, he said.

Mr. Sarenski added that even Social Security workers don’t have all the information about these strategies, so he gives clients suggestions about what to ask them.

“Folks get confused, and they wonder if it’s the right thing to do,” he said. “I feel this sets us apart from our competition.”

Even though clients are taking a risk when paying back Social Security benefits, advisers say it may be a cheaper than buying an annuity.

“I like the idea of crunching the numbers to see if it works,” said Richard Orr, director of BCU Investment Advisors. The firm, which oversees $200 million in assets, hasn’t executed such a strategy yet. “It might be better to buy back your Social Security than to buy a product.”

Another strategy to consider: Restricting a client’s benefits to spousal benefits.

Here is how it works: Let’s say a wife stopped working and is collecting Social Security benefits calculated from her work history, but her husband is still working and hasn’t begun collecting Social Security. As long as he is at full retirement age, which is 66, he can start receiving spousal benefits based on his wife’s Social Security amount.

This means that he would get half his wife’s Social Security income each month while still allowing his own benefits to accrue.

At 70, he would stop receiving his spousal benefit and file for full Social Security benefits.

“This gives him four years of added income he never thought he’d have,” said Mary Beth Franklin, an editor at Kiplinger. Ms. Franklin made her comments while leading a discussion at last week’s InvestmentNews Retirement Income Summit in Chicago.

She pointed out that this scenario usually works for what she calls “power couples,” where both the husband and wife have worked.

Although many of the strategies work for couples, children are also entitled to Social Security in certain cases, advisers said, and even ex-spouses can receive Social Security benefits. For instance, minors can receive benefits until 18 if one of their parents dies (younger widows are often encouraged to work and delay collecting survivor benefits).

In another strategy, which Ms. Franklin dubs the “Viagra college fund,” the child of any individual collecting Social Security can claim about half the parent’s benefits.

Advisers should also make sure that clients claim a spousal benefit.

For example, a wife who is at least 62 can apply for Social Security, while the husband, who is still working, can apply for a spousal benefit. At 70, the husband can switch to his own, higher benefit.

Even divorced clients are eligible to benefits from previous spouses as long as they were married 10 years before filing for divorce.

Admittedly, this rule can lead to some unusual situations, Mr. Teets said.

“People just get divorced more than they used to,” he said. “If you have a serial divorcer, there could be four wives collecting on his benefit.”

E-mail Lisa Shidler at [email protected].