On November 2, 2015, President Obama signed into law a budget deal that affects certain Social Security claiming strategies. The changes mainly affected two strategies that helped retirees increase their lifetime benefits: [i]
- File-and-suspend: A strategy in which one spouse (typically the higher earner) files and suspends a claim for benefits to allow delayed retirement credits to accrue while enabling the other spouse or a dependent to claim benefits on the higher earner’s record.
- Restricted applications: When a retiree files for spousal benefits instead of claiming his or her own personal benefit (typically to allow his or her own benefit to accrue credits while still receiving some income).
Right now, the rules are in flux and experts are weighing in on all sides.
How do the changes affect Social Security claiming strategies?
Many Americans will not be affected by the new rules because the vast majority don’t delay claiming their benefits past their Full Retirement Age. Those who may be affected have six months before the changes kick in on May 1, 2016.
Affected retirees fall into four categories:[ii]
- Retirees who have already filed and suspended or filed claims for restricted spousal benefits are grandfathered in under the new rules and will not be affected by the changes.
- Retirees who will be age 62 by January 1, 2016 (i.e. they were born before January 2, 1954)[iii] may still be able to file restricted claims for spousal benefits if their own spouse has filed for benefits.
- Retirees who will be age 66 before May 1, 2016 (i.e. they were born April 30, 1950 or earlier) may still be able to file and suspend their benefits to trigger benefits for spouses or dependents if they do so by April 30, 2016.
- Retirees who are too young to claim Social Security benefits by May 1, 2016 may not be able to use these strategies, though the timeline may change. In the future, spouses will actually have to claim their own benefits in order to trigger spousal benefits for a husband, wife, or dependent. Spouses will also not be able to just file for spousal benefits without triggering their own benefits at the same time.
How do these changes affect my retirement picture?
If you will be age 66 before May 1, 2016, please contact us to determine whether you should claim and suspend benefits to allow you to maximize your income before the rules change.
Social Security is a foundational element of a retirement income strategy, and the new rules may affect your financial picture. If you had planned to use one of these Social Security benefit strategies to increase your income in retirement, then you will need to revisit your income assumptions to help ensure that you have enough to live comfortably. However, there are still ways to increase the amount of Social Security benefits you can claim.
Married couples will still be able to take advantage of other advanced claiming strategies such as delaying one spouse’s benefit to accrue extra credits while the other claims a personal benefit. You can potentially improve your retirement income picture by:
- Claiming benefits late to earn additional retirement credits.
- Minimizing taxes paid on your Social Security benefits.
- Maximizing survivor benefits for yourself or your spouse.
One piece of good news is that the budget deal changed the 52% Medicare premium hike that was slated for 2016 to a more manageable 15%. The deal is also a small step toward resolving some of the fiscal uncertainty around Social Security.[iv]
The only constant is change
As financial professionals, our team has helped clients navigate many challenges on the path to a more comfortable retirement. Regulatory changes, market downturns, fiscal standoffs, and other hindrances happen. Often, all we can do is adapt to these changes as they occur. We’ll continue to analyze these Social Security regulations and keep you informed.
If you’re worried about your own retirement preparations or want to discuss how these changes to Social Security may affect your financial picture, please give us a call to discuss your personal situation.
Footnotes, disclosures, and sources:
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