When Congress passed the budget bill in October 2015, they included changes to social security payments that might alter the way you take payouts upon retirement. They also established a very short window of time for grandfathering in qualified applicants impacting many soon-to-be retirees. If you are currently receiving social security, your benefits will not change. However, for those with financial strategies intended to maximize social security benefits, these modifications may require a change of plans.
Today, according to the Social Security Administration, 38% of retirement income comes from social security payments. For 26% of retirees that number reaches 100% of income. This reality makes the closing of two frequently used loopholes important to address. The “File and Suspend” and “File and Restrict” strategies are being eliminated as early as December 31, 2015.
File and Suspend
The current rules allow those who have reached retirement age to have the ability to file for social security benefits and then suspend payments. The advantage of this strategy is that benefits would continue to grow while dependents and your spouse were paid.
The new law closes this loophole as of April 30, 2016. After than time, those who have reached retirement age will still be able to use the File and Suspend strategy to benefit your spouse and qualified dependents. Anyone not at full retirement (66) by this date will still be able to File and Suspend; however, the suspension will also suspend payments for the spouse and dependents, essentially rendering the strategy dead.
File and Restrict
This strategy impacts the use of spousal benefits and mostly impacts women. Spousal benefits can be paid when the spouse reaches 62 and your spouse is collecting benefits. Spousal benefits can also be paid if you have a dependent child 16 years old or younger. For those divorced and not remarried, you may qualify for a spousal benefit from your ex-spouse if you were married for at least 10 years. The spousal benefit offers a payment of up to 50% of your spouse’s social security.
Currently the law allows the spouse to begin receiving the spouse benefit initially and then transfer to a higher personal payment when you reach retirement. A spousal benefit could be paid as early as 62 with no dependents. This allowed spouses to begin collecting the spousal benefit (often combined with the File and Suspend strategy) to receive payments earlier, while letting their own benefit grow.
Those who reach the age of 62 by December 31, 2015 will be grandfathered in and will file based on the current rules. Anyone younger than 62 will have to choose the spousal or personal benefit when you file, and will not be able to change to a higher benefit at a later time.
What Will Stay the Same
Those who are currently using these strategies will not see any changes. Widows will still have the option of taking current payments or the spousal benefit, depending on which option offers the highest payout.
Strategy Going Forward
When evaluating the amount of savings needed for retirement, it will be necessary to address these changes, as it can result in receiving thousands of dollars less in your early retirement years. Making up for shortfalls prior to retirement will help prevent running out of money prematurely.