Last month, President Obama signed the Bipartisan Budget Act of 2015 into law. If you heard about this in the news, you likely know the law raises the debt limit, prevents a possible government shutdown, and ensures the United States won’t default on its debt.
But here’s something you may not have heard about: the changes to Social Security and the consequences the law has for retirees.
From a retiree’s point of view, Social Security is a guaranteed stream of income, something no one should ever neglect. And while Social Security alone typically isn’t enough to help you reach your retirement goals, there are ways to maximize your benefits.
One of those ways, however, is coming to an end.
First, some context. For a long time, one of the most popular strategies for increasing benefits is to simply delay collecting them. For example, even though people can technically start receiving benefits as early as age 62, their benefits would be greatly reduced. Waiting until your “full retirement age” (FRA)—the age at which a person first becomes entitled to “full” or “unreduced” benefits—is often a smarter option. In most cases, the year you were born determines your full retirement age.
Delaying your benefits even longer is possible, too. In fact, the latest you can begin collecting benefits is at age 70, and there’s good reason to hold off until then if you can afford it. You see, benefit payments go up 8% every year you wait up to age 70. In other words, the longer you can keep your hand out of the cookie jar, the more sweets you’ll eventually receive.
In addition, it has long been possible to maximize your benefits even further by coupling two options together: file-and-suspend and restricted application for spousal benefits. Here’s how it works.
Imagine a married couple, John and Mary. Both are 66 years old. Both are eligible to receive Social Security benefits. Now imagine that John files for benefits and then suspends actually receiving them. John does this because he wants to take advantage of the 8% increase that comes from waiting. This is the file-and-suspend option.
Meanwhile, Mary files a restricted application for spousal benefits. Mary will receive 50% of John’s PIA (Primary Insurance Amount) assuming she files at her FRA. This means she can receive a benefit based on John’s earnings instead of collecting her own, even if her own benefits would be higher. The advantage to combining these options is that both John and Mary will receive larger benefits at age 70, while in the meantime, Mary still gets a regular spousal benefit to help pay for retirement. Some experts estimate this strategy can raise your retirement income by as much as $60,000 or more.1
Sounds like a smart move, right? Unfortunately, the Bipartisan Budget Act of 2015 has put an end to it. Starting April 2016, neither file-and-suspend nor restricted application will be an option.
To be clear, it’s still legal to delay collecting your benefits. It’s the concept of allowing a family member to collect benefits based on your earnings while you suspend them that’s being eliminated.
Some other things to know:
- Retirees who have already started using these strategies will not be affected
- Retirees 66 and older who have not used them still have a 6-month period to do so before the law goes into effect
- It’s still possible to apply for a spousal benefit, but under different conditions. For example, John would have to actually be receiving his benefits (instead of suspending them) for Mary to claim a spousal benefit.
Of course, there are lots of little details that can’t be covered in a single message, but at least now you understand the basics.
Social Security is a complex topic, and these changes certainly don’t make it any easier. So here’s what I recommend: call me at 952-542-8900 if you have any questions. If there’s anything about these changes you don’t understand or are concerned about, or if you simply want a frank appraisal of your options, let’s talk. I’d be happy to discuss Social Security with you in more detail, something that’s not really possible to do in a message.
In the meantime, always remember that the 360 Financial team is here to help you with all your retirement needs. Please don’t hesitate to contact us at any time. Our door is always open!
1 Anne Tergesen, “New Social Security Rules to End Key Filing Strategies,” The Wall Street Journal, October 31, 2015.
You can find additional information from the Social Security Administration website
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial professional.
The hypothetical examples presented are not representative of any specific scenario. Your results may vary.