DO THE RECENT CHANGES TO SOCIAL SECURITY BENEFITS AFFECT YOU?
By MARY LYNNE DAHL, CFP®
April 07, 2016
To begin with, know that Social Security allows an individual to claim his or her own benefits at full retirement age, which is now age 66 or 67, or file for a spousal benefit that is equal to 50% of the benefit that their spouse is entitled to. Generally, (there are exceptions) spousal benefits begin as early as age 62, but if you defer taking them until full retirement age(66 or 67) or later, at age 70, they automatically grow by 8% per year (guaranteed). Waiting until age 70 instead of taking them at 62 can increase the benefit amount by almost 75%. Do the math!
Because benefits are so much greater if you wait until age 70 to start taking them, several strategies have developed that maximize the way a married couple gets those benefits. One of those strategies is to file for benefits at full retirement age but suspend, waiting until age 70 to actually begin receiving those benefits. That way, if your spouse is eligible for spousal benefits (by being age 62 or older), he or she can start getting benefits based on your earnings and delay his or her own benefits until age 70 also, thereby getting the 8% extra credit per year during the waiting period. This is called “file-and- suspend”.
Another strategy is for your spouse who has reached full retirement age to file for spousal benefits only, while their own benefit gets the 8% per year credit, while you are taking your own benefits. This called filing for “restricted benefits”. Your spouse gets a smaller benefit now and a larger benefit later.
These benefits will expire on April 30, 2016 , which is why many people should apply by April 29, 2016, if they are eligible for the restricted benefit strategy or the file-and- suspend strategy.
In a restricted benefit example, assume that you are age 66, not taking benefits, and your spouse, who is 69, is getting a benefit of $1,750 per month. You file for a restricted benefit and get $875 per month until you are 70, at which time you switch to your own benefit, which has earned the extra 8% per year of credits from your age 66 to 70, and is now $2,000 per month. The strategy allows you to receive $875 per month while you wait for your own benefits, allowing them to grow to a much larger amount via the 8% extra credit annually.
In a file-and-suspend example, if you are age 62 and married to a spouse age 66 who files and suspends, it is your spouse who waits to get the extra benefits of the 8% per year of delayed credits. You are entitled to file for a spousal benefit now and get your own benefit later when you are older.
Many married people did not file for spousal benefits because their spouse had not yet filed as well, not realizing that if their spouse filed and suspended, they could, in fact, file for spousal benefits. Many other people filed at age 65 or 66 without knowing that if they waited until age 70, their benefit amount would earn 8% per year, as well. Individuals who continue to work should definite wait until age 70, but even some people who retire but have other resources are well advised to wait as well. The 8% per year is simply too good to pass up, in the opinion of most financial advisors.
The changes to the law will eliminate the restricted filing strategy and the file-and-suspend strategies for getting benefits early and doing what some people think of as “double dipping”, legally. It affects married couples primarily, but not widowed people or divorced people. Under the new law, people who turn 62 in 2016 will lose the option of filing for restricted benefits; they will have to claim all of their own benefits, not just a restricted benefit, upon filing. Under the new rules, when someone files-and-suspends his or her own benefit, a spousal benefit is also suspended. The new law changes things dramatically.
Social Security is so complex that even employees of the Social Security system sometimes cannot explain these benefit changes. We inquired several times about them and got dramatically differing answers to our questions. In one case, the Social Security employee, who was a “benefits specialist”, did not have any idea what we were talking about. Be careful, therefore, and aware, that getting accurate information is not easy, and understanding the rules is very complicated. It is kind of like calling the IRS for help with your taxes!
Many people who are impacted by these new rules and who would like to apply before the April 29, 2016 deadline have been told by their local Social Security office that they cannot get an appointment until May 2016 or later. In that case, we advise that applicants go online to apply. If you do apply online, be absolutely clear in the remarks section, at the end of the application, that you want to restricted-file or file-and-suspend on the date of the online filing whichever applies to you. Keep a copy of the application showing the date you filed and the date you want to start the restricted or suspended benefits. Filing online avoids the chance of speaking with a Social Security agent who does not know the new rules or is not informed correctly about your rights to file. If you do get an appointment with an agent of the Social Security administration and are able to file an application in person, request 2 copies of the completed application and ask the agent to date and sign your copy, in case you run into problems later that relate to the date of your application.
Regardless of the problems in getting accurate information, know that if you were going to use one of these strategies to get extra Social Security benefits as a married couple, you only have until April 29, 2016 to file the required application. After that date, these strategies are no longer available. Anyone already using one of these strategies is grandfathered, however, and will not be affected. Anyone already receiving benefits is also not impacted at all. So, if you think that you are eligible for and want to apply for either of these soon to disappear benefits, act now. As of April 30, 2016, it will be too late.
©2016 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.
Mary Lynne Dahl©2016
Mary Lynn Dahl can be reached at firstname.lastname@example.org
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