Recent Social Security Changes Will Affect Couples Nearing Retirement
The federal Bipartisan Budget Act of 2015 dramatically altered some beneficial Social Security optimization strategies for married couples who are near retirement. The strategy known as “File-and-Suspend” has been all but eliminated for people who haven’t yet reached Full Retirement Age.
This is a meaningful setback for couples that were planning on the big income boost that a file-and-suspend strategy provided later in retirement. What impact will this have on your retirement plan? And how can you best plan around this development?
What Has Changed
Under the rules existing since 2000, when a worker reached full retirement age, typically 66, he or she could file for Social Security benefit eligibility and simultaneously suspend his or her benefits. This allowed that worker’s spouse to start receiving spousal benefits (equal to 50% of the worker’s retirement benefit). The spouse could also delay receiving his or her own eligible benefits until age 70. At the same time, by suspending his or her benefits, the worker’s benefits could continue to increase by 8% for each year until reaching age 70, at which time he or she would begin to receive the full increased benefits. This allowed a retired couple to significantly (and permanently) increase the amount they would receive over their lifetimes from Social Security.
This strategy was particularly helpful when the worker’s spouse could receive a higher spousal benefit than he or she would be entitled to on his or her own work record.
Under the new rules, which go into effect April 30, 2016, suspension of benefits will no longer be permitted. This means that if a spouse decides to delay benefits, the other spouse will not be able to start receiving spousal income based on the first spouse’s full age benefit during that delay period.
What Hasn’t Changed
A spouse can still delay retirement benefits and receive the 8% growth in benefits. Those increased benefits will still be for the life of that spouse, and if one spouse pre-deceases the other spouse, that increased benefit will still be payable to the surviving spouse as a survivor benefit.
How Couples Can Plan for the Social Security Changes
If you are already taking Social Security, then these changes should not impact you at all. Those who will reach full retirement age by April 2016 and have not yet begun taking Social Security benefits should consider the file-and-suspend strategy before they lose the opportunity to do so. Not taking advantage of this strategy could mean losing as much as $60,000 in benefits over a four-year-period. For people born between April 30, 1950 and January 1, 1954, the planning is a bit more complex. For those born after January 1 1954, this strategy is simply no longer available.
It’s also important to note that the way the law is written could unintentionally limit an unmarried divorced person from claiming a Social Security benefit based on the ex-spouse’s record if the ex-spouse suspends his or her own Social Security benefits.
If you are in the range of ages discussed, you may be affected by these changes. We can help you to figure out how the changes may impact you, and adjust your retirement income strategy as necessary. Please reach out to us if we can be of assistance.