Advisers rethink retirement plans amid Social Security changes

Groundbreaking Social Security reform contained in budget legislation approved at breathtaking speed this week by Congress has financial advisers scrambling to rethink many of their clients' retirement plans. The measure, passed by the Senate early Friday morning after being approved by the House earlier in the week, includes a provision that ends two popular Social Security claiming strategies: file-and-suspend and filing for a restricted claim of spousal benefits. Both approaches generate higher benefit payouts for entitlement recipients and have been baked into retirement planning for many aging clients. “We're going to have to take all of that, throw it in the trash can, and do the analysis all over again,” said Michael Kalscheur, senior financial consultant at Castle Wealth Advisors. “That's going to be a huge task for planners to try to figure out how to make up for that shortfall in income.” Clients will have to tap other financial resources to fill in the retirement-funding gap, said Robyn Hari, principal at Diversified Trust. That may include cutting personal expenses, continuing to work or depending more on their children. “They may not have much time to make up that difference,” Ms. Hari said. “They'll have to look at adjusting their standard of living or working longer.” Clients who have not saved enough for retirement and were depending on the extra boost from Social Security with these particular spousal claiming strategies will be hit the hardest. “For somebody who was tenuous, this may be the thing that pushes them over the edge,” said Don St. Clair, owner of St. Clair Financial. “They'll have to delay retirement or live on less.” Changes to Social Security claiming strategies will take effect within six months of it being enacted. President Barack Obama is expected soon to sign the measure, which sets federal spending limits for the next two years and lifts the ceiling on the federal debt limit. Once the reforms go into effect, no one who turns 62 in 2016 or later will be able to utilizing the claiming techniques. The original legislation was revised so that it would not affect payments to people who are already collecting benefits through file-and-suspend, according to congressional aides. The fast implementation timetable has advisers clambering to get clients who are close to retirement to speed up their decisions on whether to do file-and-suspend. “We've reached out to anyone who may be eligible in the next six months to do it,” said Blair Duquesnay, chief investment officer at ThirtyNorth Investments. “We want to make sure we don't miss anyone who may be able to take advantage of it.” Jim McCarthy, managing director of Directional Wealth Management, also is reviewing his client database with an eye toward the expiration of file-and-suspend. “We'll run the numbers and see if it makes sense to implement the claiming strategy,” he said. Under file-and-suspend, a claimant can file for benefits at the full retirement age of 66 and put off receiving them until he or she retires at 70. Over those years, the benefit grows at about an 8% annual rate. Meanwhile, his or her spouse can claim the spousal benefit -- one half of the claimant's benefit at full retiremement age. The strategy costs the Social Security Administration several billion dollars a year in revenue, according to estimates, and is seen as a “loophole” that benefits mainly the wealthy. As congressional leaders and the White House cobbled together the budget agreement, negotiators required spending reductions to offset increases in federal spending caps. One of the areas targeted was Social Security. The measure “closes several loopholes in Social Security's rules about deemed filing, dual entitlement and benefit suspension in order to prevent individuals from obtaining larger benefits than Congress intended,” states a summary of the bill. But advisers say the impact of the reform will extend well beyond wealthy Social Security recipients. “There are a lot of my clients who are nowhere near the 1% [of richest Americans] who are able to take advantage of this strategy,” Mr. McCarthy said. Paul Auslander, director of financial planning at ProVise Management Group, said Congress will be criticized for the Social Security moves. “There are a lot of Americans who rely on these strategies to pick up $700 or $800 a month, and that makes a big difference in their quality of life,” he said. “They'll be resentful.” Usually changes to Social Security occur over years. This time around, it happened during backroom budget negotiations over the course of days. “This is coming out of left field,” Mr. Kalscheur said.