Broker Check

Social Security Update 

The changes that are coming for this year, and how they may affect you.

Social Security has two changes on the horizon, and it is important to understand them, especially if you or your spouse is between the ages of 62 and 66 and have not yet started taking Social Security. In developing a comprehensive DBT360 Financial Plan® for my clients, I analyze all potential future sources of income. Part of our work includes developing a plan to maximize a client’s benefits from Social Security. Social Security is not a “one size fits all” answer, but the information below should be helpful as you decide the best strategy for you.

Feel free to share this information with friends, family, or clients, as this information is brand new, has not been widely reported outside of the financial services world, and has a very short time frame for workers to make a decision.

First, a quick recap on Social Security:

Workers reach Full Retirement Age (FRA) around age 66, depending on when the worker was born. (For those born between 1943 and 1954, the FRA is 66.) If a worker chooses to start Social Security at the earliest age possible (62 years old), the benefit will be 25% less than the FRA amount. This discount decreases as the worker gets closer to FRA. If the worker delays Social Security past the FRA, the benefit will increase by 8% per year until the benefit is maxed out at age 70.

Current changes

While I would love to say that the changes in the Bipartisan Budget Act of 2015 were thoughtfully considered, it appears that the changes were part of the horse trading that happens in the final hours of negotiating the budget. Once Congress passed the change, it was up to the Social Security Administration (SSA) to finalize how the changes would be implemented. The SSA provided two instructional releases to its field offices this month, and we can now use these directives to design and implement strategies with our clients. Since the changes eliminate some of the unique ways that we recommended that our clients use to maximize their Social Security resource in retirement, we are developing new strategies to recommend to our clients. Let’s walk through the changes so you can determine if you need to update your Social Security plan.

File and Suspend

This strategy allowed those who reached full retirement age to “file and suspend” their benefit, which was especially useful for married couples. Doing so triggered the option for a spouse or dependent child to receive a benefit, while the “suspended” worker’s benefit continued to grow. The “suspended” benefit grew at 8% per year, so the worker could increase her own benefit by up to 32% between the ages of 66 and 70. Additionally, the “suspended” benefit could be collected as a lump sum at the end of the period. In the meantime, your spouse was able to take Social Security based on your earnings record. It was usually a great way to get spousal income now and then increase the worker’s future benefit, thereby maximizing benefits for a couple.

New Rules:

  • If you suspend your own benefit, you will also suspend benefits for spouses and dependents
  • The lump sum payout will no longer be an option
  • Anyone who requests the extension by April 29 will be grandfathered under the old rules

Your Next Move:

If you are already in the “file and suspend” mode with the SSA, you have no action to take, as those workers are not affected. If you will be age 66 or older before April 29, and have not triggered “file and suspend” but would like to, you have a deadline of April 29 to do so, and you should apply for the option as soon as possible, either online or via an appointment with your local SSA office. This will also allow you the option to request a lump sum payout of the suspended benefits in the future, instead of earning delayed credits. If you are 66 or older by April 29, and your spouse is 62, this will also preserve the option for your spouse to file a restricted application later.

Going forward, a worker might consider the “file and suspend” scenario if (s)he files for Social Security at age 62, and later returns to work. The worker then may choose to suspend the Social Security payment at 66 (meaning they receive no payment) until age 70, in order to maximize the lifetime benefit.

Restricted Application

The restricted application option was also taken away for anyone under age 62 on December 31, 2015. The restricted application formerly allowed workers to collect the “spouse only” benefit while delaying their own benefit, even if the spousal benefit was lower than their own individual benefit. In order to collect a spousal benefit, the new law requires that you collect your own individual benefit first.

A few other details:

The new law applies to retirement benefits, and not survivor benefits, which comes from a different pool of money. That is important if you are eligible for your own retirement benefits and also benefits as a surviving spouse or surviving divorced spouse. You can then collect one type of benefit first and switch to the other later if it would result in a larger benefit.

Divorced spouses who were married at least 10 years and who are currently single can still collect benefits on their ex-spouse's earnings record.

The Social Security Administration said it will honor requests that were submitted before the April 29 deadline, even if the agency processes the request after the deadline.

The SSA has just released this information recently on their website and to their field offices, so we anticipate that the rules will be clarified further based on unique worker circumstances. For more information:

Even though some of our favorite claiming strategies are going away, it will still be necessary to design a Social Security plan for our clients as they prepare for retirement, especially if they are married. If you would like us to provide you with a personalized Social Security analysis, or would like more information regarding a comprehensive DBT360 Financial Plan®, please contact us.

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