As of May 1, 2016, a Social Security rule that had allowed spouses to use a “file-and-suspend” option to assist in optimizing their Social Security benefits is longer be available. The change, part of a November 2015 bipartisan budget act of 2015, means that spouses who had planned to coordinate benefits in order to increase the overall amount of income they receive from Social Security no longer have that option. —
In addition, people older than age 66 who filed for benefits and suspended them in order to increase their payout rate later are no longer able to receive a retroactive lump sum payment if they change their mind and cancel the suspension before age 70. These latest cuts to Social Security options were added to previous rule changes that closed other strategic filing options in 2015, in order to save money in the Social Security program.
According to Anthony Kurnellas, President of Omnitrust Financial Group in Jacksonville Florida, the file-and-suspend strategy gave couples the opportunity to increase their combined benefits by allowing one spouse to file for Social Security benefits upon reaching the full retirement age of 66 and immediately suspend their benefits to accrue delayed retirement credits at a rate of 8 percent annually to age 70. When the other spouse retired, the one who suspended their benefits could claim a spousal benefit while their deferred Social Security benefits grew. Still, the rule changes don’t spell doom and gloom, he says.
“It’s really a small change, but Social Security for the most part isn’t changing,” Kurnellas, an investment advisor and insurance professional, says. “This new rule affects about 9 percent of the population, but one of the things I have to stress is that baby boomers still need to be informed about Social Security claiming options because it’s still an important part of their plan for retirement income.”
Although the file-and-suspend option was originally put in place to encourage older people to continue working through age 70, it became a popular strategy among financial advisors for helping retirees increase their Social Security income.
As of May 1, the option is no longer available, a move many pre-retirees and retirees never saw coming. While the loss of the file-and-suspend strategy gained the most attention leading up to the May 1 deadline, the fact is that retirees are actually losing three separate Social Security claiming options.
After May 1, retirees who had not reached age 66 by April 30, 2016 must file for Social Security and actually collect their benefits in order for their husband or wife to receive a spousal benefit. Those who were at least 66 older by April 30, 2016 are still able to take advantage of the file-and-suspend option, as they are grandfathered in under the new rules.
The second option eliminated was the filing of restricted applications, which allowed individuals between age 66 and 70 to file a restricted application to claim spousal benefits and defer their own benefits until age 70. Upon reaching 70, they could switch from receiving spousal benefits to their own, higher benefits.
Since May 1, when a spouse files anytime after age 62, he or she will fall under the “deemed filing” rule, which previously applied only to individuals who filed before their full retirement age.
With the elimination of restricted applications and the inception of deemed filing for all ages, a spouse can only receive either their spousal benefit or their own benefit, whichever is larger. Once they choose an option, they will not be able to change their mind—which means they will not be able to defer benefits until age 70 and then switch options for a larger monthly payment. However, anyone who reached age 62 by the end of 2015 was grandfathered in and eligible to stick with the old rules for restricted applications.
The third change relates to suspended benefits, which had allowed individuals who had suspended their benefits to unsuspend them before reaching age 70 and request a lump sum payment retroactive back to their filing date. That is, an individual who retired at age 66 and suspended his or her Social Security benefits to age 70 could retroactively end the benefit suspension if they had a serious medical condition or other financial strain and needed immediate access to their benefits. As of May 1, anyone who decides to end their benefit suspension before turning 70 will lose the remaining retirement credits they would have received if they had deferred payments to age 70, and will not be able to receive a lump sum payment. Instead, Social Security will begin sending their monthly payments at a higher rate, reflecting interest accrued during the period of time their benefits were suspended.
Individuals affected by the new rules can plan ahead to compensate for any impact they may have to their retirement income plans.
Individuals who do choose to defer payments until age 70 will still receive the 8 percent deferred income credits upon reaching 70.
“One of the main things I stress when people come to see me is to plan ahead, beginning with a budget that reflects how much income they’ll need to pay their bills and enjoy their retirement,” Kurnellas says. “They still need to incorporate Social Security benefits in their entire plan, look at what other income they have coming in and work in other Social Security scenarios.
“I also stress that they need to factor in inflation, because Social Security is a really good benefit because it does adjust with inflation,” he says. “If people defer payments past age 66, for every year past 66 you still get an 8 percent credit, your Social Security is going to increase by 8 percent but it’s 8 percent that is going to be compounded with your cost of living adjustment for the rest of your life, so you’re getting more money in your pocket.”
Even deferring benefits for just one year, he says, means retirees can end up with an extra $20,000 if they live to be 87 years old, and deferring their benefits for just one year may not be a hardship for many.
While the rule changes are significant, Kurnellas stresses that they won’t affect how Social Security benefits are calculated.
“The core benefits are not changing,” he says. “There is no change in how anyone’s benefits are calculated.”
Source URL: http://councilofeliteadvisors.com/liftmedia
Release ID: 114071