Important changes to your Social Security benefits
Recently President Obama signed into law a budget agreement that will avert a government default and shutdown, saving us all from what we experienced in 2013. Great news, right? Unfortunately the new bill will have devastating effects on millions of Social Security (SS) recipients.
The new section 831 of the budget bill, called “Protecting Social Security Benefits” is, in fact, harming many Americans. The bill calls for spending cuts to SS and savings mostly due to tighter eligibility requirements. I will attempt to make this as clear as possible, given the complex and convoluted nature of our system.
Presently, full retirement age (FRA) is 66. The credits paid into retirement during your working years are calculated and a monthly benefit is provided based on your work record. If you choose to take SS early, you can do so at 62, however, your benefits will be reduced. Conversely, if you delay taking SS until 70, your benefits are increased, significantly in fact, at 8% a year for each year between 66 and 70. Benefits for what I will call “dependents” also attach to your SS. First is your spouse. If you are married, your spouse can either receive his or her own retirement benefit (if they worked), or a spousal benefit, whichever is greater. If you have a child under the age of 18 or a disabled child, they are entitled to receive SS, based on your benefit. Finally, a divorcee, if previously married for over 10 years, can also receive benefits.
As our clients and many others plan for retirement we perform analysis we call a Social Security Maximization Strategy. This is a strategy designed to provide those nearing retirement a clear path and understanding of what SS they can claim and how much cash flow it will provide. A strategy often used is something called File and Suspend. This allows someone turning FRA to file for SS, then suspend receiving benefits until they are 70. This “trigger” allows a dependent (spouse, child or special needs child) to begin to receive benefits while the wage earner suspends benefits until age 70, thus maximizing the amount he/she may receive. There are several other iterations of this method, all intending to maximize the benefit and provide a clear picture for retirees of the income they can expect, and what they will need to supplement themselves in order to maintain their desired lifestyle in retirement.
The new bill will no longer allow File and Suspend to operate in this way. The new language provides that when you file, your benefits and those to your dependents, will be paid. This means that either the wage earner will not get the benefit of the 4 years of 8% growth and will get a lower than expected payout because benefits will begin at 66 or, and consequently “dependents” will not be able to receive benefits until the wage earner decides to file, and if they do so at 70, the dependents will have zero benefits for 4 years.
Those with the most to lose will not be those couples who can afford to hire a Wealth Advisor to help plan for retirement; it will be married and potentially, divorced women who haven’t ever paid into SS on their own and children, whether disabled or traditional, who will lose up to four years of expected income.
One can argue the fairness of the current program all day long, however, it is a cruel pill to swallow to learn that after years of planning and saving for retirement, your benefits, or the benefits for those you love, will be reduced by thousands and thousands of dollars during the period of time in your life when you need them the most…when your income earning power is gone.
What should you do?
If you are 66 or older or will turn 66 in the next six months and would like to file and suspend in order to get your children or spouses full benefits you must do so in the next six months. Deadline is April 30th, 2016. Your spouse must be 62 or turn 62 in 2015 and you must file something called a Restricted Application, in order to receive the spousal benefit. Once you make a decision, call and set up a meeting with the Social Security Administration Office. Call soon, as I am sure they will be swamped with questions and applications over the next six months.
If you are currently using this strategy, you are grandfathered in, and don’t need to do anything.
Contact your financial advisor to understand how this change effects your retirement planning.
There are several other changes and unintended consequences to this scattershot approach; we cannot piecemeal SS, we must demand holistic reform so that we clearly understand our benefits and have a system in place that is both fair and reliable for America’s current and future generations.
The information herein is general in nature and should not be considered insurance, legal or tax advice. Please consult with an insurance, legal or tax professional for additional information.
Charleston Investment Advisors is part of The Wealth Management Alliance LLC, a registered investment adviser. TW 15-016 (11/17).