What Social Security Changes Mean For You
The federal Bipartisan Budget Act of 2015 came as a mixed blessing for Baby Boomers who are at or near retirement. While the deal passed by Congress in late September avoided an ugly political fight and government shutdown, it also dramatically altered some beneficial Social Security optimization strategies for married couples who are near retirement. The strategy known as file-and-suspend has been all but eliminated for people who haven’t yet reached Full Retirement Age.
This is a meaningful setback for couples that were planning on the big income boost that a file-and suspend strategy provided later in retirement. What impact will this have on your retirement plan? And how can you best plan around this development?
What has changed
Under the rules existing since 2000, when a worker reached full retirement age, typically 66, he or she could file for Social Security benefit eligibility and simultaneously suspend his or her benefits. This allowed that worker’s spouse to start receiving spousal benefits (equal to 50 percent of the worker’s retirement benefit). Dependent children could also be eligible to receive benefits. The spouse could also delay receiving his or her own eligible benefits until age 70. At the same time, by suspending his or her benefits, the worker’s benefits could continue to increase by eight percent for each year until reaching age 70, at which time he or she would begin to receive the full increased benefits. This allowed a retired couple to significantly (and permanently) increase the amount they would receive over their lifetimes from Social Security.
This strategy was particularly helpful when the worker’s spouse could receive a higher spousal benefit than he or she would be entitled to on his or her own work record.
Under the new rules, which go into effect April 30, 2016, suspension of benefits will no longer be permitted. This means that if a spouse decides to delay benefits, the other spouse will not be able to start receiving spousal income based on the first spouse’s full age benefit during that delay period.
What Hasn’t Changed
A person can still delay retirement benefits and receive the eight percent growth in benefits. Those increased benefits will still be for the life of that person, and that increased benefit will still be payable to an eligible surviving spouse as a survivor benefit.
In addition, someone who files to receive their benefits early can still “change their mind” and suspend their benefits to allow them to grow until age 70.
How You Can Plan for the Changes
If you are already taking Social Security, then these changes should not impact you at all. Those who will reach full retirement age by April 2016 and have not yet begun taking Social Security benefits should consider the file and suspend strategy before they lose the opportunity to do so. Not taking advantage of this strategy could mean losing as much as $60,000 in benefits over a four-year-period. For people born between April 30, 1950 and January 1, 1954, the planning is a bit more complex. For those born after January 1 1954, this strategy is simply no longer available.
It’s also important to note that the way the law is written could unintentionally limit an unmarried divorced person from claiming a social security benefit based on the ex-spouse’s record if the ex-spouse suspends his or her own Social Security benefits.
A Certified Financial Planner™ Professional can help you to figure out how these changes may impact you, and help you to adjust your retirement income strategy if necessary.
This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director and chief investment officer with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at brooks@bfadvisors.com. Brooks and his family live in Mission Hills.
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