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What the Changes to Social Security Will Mean For You

What the Changes to Social Security Will Mean For You

While you were focused on a million things this fall, something huge happened to Social Security. When President Obama signed the Bipartisan Budget Act of 2015, nestled among all the provisions were major changes to Social Security.

"These new rules make up the biggest reform to Social Security in 15 years. It’s not yet known how much money will be saved, but changes were necessary to keep the program funded. The last Social Security Trustee Report warned that Social Security would run out of money by 2033, and only be able to meet about 77% of its obligations after that point. This move is not a complete fix, but it will help the future of the program," says Nahum Daniels, a certified financial planner and retirement income certified specialist.

What does this "fix" include? Here’s what you need to know.

Fewer tools to maximize Social Security benefits

There will no longer be an option to "file and suspend". In the past, the file and suspend strategy was used like this. The primary wage earner applied for benefits, then suspended collecting. The other spouse immediately started collecting spousal benefits, allowing the primary wage earner’s benefits to grow by 8% per year until he or she reached age 70. Under the new rules, explains Daniels, no one will be allowed to collect a spousal benefit when the wage earner’s benefit is suspended. Couples who have already suspended benefits or will suspend benefits prior to May 1, 2016, will be "grandfathered" in. "Getting rid of this strategy could cost millions of future retirees as much as $50,000 in lifetime benefits," says Daniels.

These new rules make up the biggest reform to Social Security in 15 years.

Forget about retroactive benefits. Previously you could file for benefits, suspend them, and later request a retroactive lump sum for the time period in which benefits were suspended. The new law gets rid of this option. Moving forward, the only reason to file a suspension will be to correct a mistake. You will be able to accumulate delayed credits, says Daniels, but no one will be able to claim benefits on your record while it is suspended.

Then there’s the loss of the ability to file a restricted application. Prior to the new laws, people eligible for both spousal benefits and benefits on their own record could file a restricted application, meaning that at full retirement age, they could file for spousal benefits only, while allowing their benefits to grow. They would be eligible to switch to their own benefit at a later date. Under the budget deal, this strategy is no longer an option for anyone born January 2, 1954 or later.

Matt Cabray of Ridgewood Financial illustrates how big a deal the loss of this provision will be. Under the old rules, say a husband, age 66, and a wife, age 62, both want to retire at the same time, this is what they could have done. Assume that each is eligible for a $2,000 benefit per month at their full retirement age of 66. Because the wife is not her full retirement age, she would face a 25% reduction in benefits if she collected her benefit prior to age 66. As a result of the reduction, she would receive $1,500 a month at age 62. What the husband could do is apply for a "restrictive application" in which he is entitled to 50% of his eligible benefit or $1,000, all while allowing his benefit to continue to compound at 8% until age 70. At 70, he would apply for his own benefit based on his work history and would be eligible for a benefit of $2,640 ($2,000 compounding at 8% for four years). So while their benefit over the next four years would be $2,500, instead of $3,400, if they both elected benefits at the same time, because of the restricted application, they would collect a total of $4,140, instead of $3,500 at age 70 for as long as they live. Of additional importance is the higher survivor benefit of $2,640, versus $2,000, as a surviving spouse can only collect the higher of the two benefits upon the death of a spouse.

What now?

With Social Security such an important piece in most everyone’s retirement pie, there’s no room for missteps. The experts weigh in with strategies for dealing with the changes.

If you have already reached your Full Retirement Age (FRA), or will reach it on or before April 29, 2016, then initiating a File and Suspend filing with the Social Security Administration on or before April 29, 2016 will preserve the option for your spouse to receive a spousal benefit while your Social Security benefit continues to grow, says Terry Seaton, a consumer education advocate for the American Institute of CPAs.

If you’re a divorcee, were married at least 10 years and divorced for at least two years, relax, you’re not affected by rule changes. Why not? "It has never been a requirement that our former spouse even file for benefits in order for you to receive your spousal benefit," says Seaton. However, if you are a divorcee, were married for at least 10 years, but not divorced for at least two years, then the new rules apply to you.

If your spouse is deceased, you are not affected by these rule changes. You can still file for a spousal "survivor" benefit as early as age 60, allow your benefits to grow until 70, and then filed for a combination of benefits based on your own personal record and that of your deceased spouse, says Seaton.

The bottom line – talk to your financial advisor. Josh Trubow, a certified financial planner with Sensible Financial Planning offers this advice, "Couples should understand whether these changes will affect their benefit. If so, they should have some perspective on how much of a loss they might incur. They might want to work a little longer to make up for these losses if they were counting on Social Security as part of their financial plan, and determine how they can reduce spending in retirement."

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Anonymous   |     |   Comment #1
Why were SS changes made that affect some couples 60+.  All political talk always stated they would always grandfather the group above 60.  More lies!!!!
Anonymous   |     |   Comment #2


Anonymous   |     |   Comment #3
It seems like everything that comes out of Washington is nothing but garbled!
Anonymous   |     |   Comment #5
I was a little confused by the next to last paragraph's reference to 'file for a combination of benefits based on your own personal record and that of your deceased spouse'.  I thought you get benefits based on yours OR your spouse's earnings, not based on both. is there such a thing as getting benefits based on BOTH earnings?
Anonymous   |     |   Comment #6
I have read various article from this author.  Makes too many errors.
Anonymous   |     |   Comment #8
I agree.  They are longwinded and repeat what has been in the financial news for weeks.  Not a thinker, just a summarizer.
Anonymous   |     |   Comment #9
I am assuming that Sheryl is a relative or friend of Ken.  This is no other reason that Ken would be paying for these type of articles.  Nepotism, this is the end result.
Anonymous   |     |   Comment #12
Kin, Friend, or whatnot.
This site had a different commentators sometime in the past
and wasn't really liked. The one we have now was better and
hasn't received much negative feedback.
Anonymous   |     |   Comment #17
To comment #12.
The one we have now is better?  Can't you read the comments and number of votes for the comments above?  Sounds like pretty negative feedback to me!
DScott   |     |   Comment #7
Well, if you ask me, the most critical part of preparing for retirement is just having a plan. Whether you use a spreadsheet or a tool like OnTrajectory or some other website -- you have to get everything out in front of you so you can make smarter decisions. Once you do that, then implementing your disciplined retirement strategy becomes critical.
Anonymous   |     |   Comment #10
DScot, I agree with you.  However, what has been thrown at us the last 7 years couldn't have been in any plan.  It appears the seniors and savers are bailing out wall street and the banks.
Anonymous   |     |   Comment #11
What you said is true. We can only make plans and decisions based on what is known at the time.  That is why, when in the planning stage, you must ask yourself  "what if" and have an alternative plan in mind.  Granted,  we can not anticipate and have a plan in place for every unforeseen situation. 
Anonymous   |     |   Comment #13
Do not count on Social Security. I don't. Do all of you understand that the money you "pay in" to SS is a tax? A tax just like any other tax. And the government is under absolutely NO obligation to pay it back to you??  Also.....There is no "trust fund".......All the money paid in goes to general revenue( since it is a tax) and has been spent......All of you need to understand that. SS will not last and will implode. At best it will be re-directed to the elderly that are in true poverty. That's even a long shot. It's done and you will not get the money that was paid.
Anonymous   |     |   Comment #15
No disagreement.  Without question SS will implode.  Only question is whether SS implosion will coincide with implosion of America, or precede it.
Anonymous   |     |   Comment #18
It doesn't have it implode. Starting at age 70, they can send you $100 a month with no problem!
Anonymous   |     |   Comment #14
What was just passed is what was meant to be in the law passed in 1990. Before then people had to collect when they reached full retirement age. There were no higher benefits at 70. So file and suspend was passed so that
a person was able to work and continue to get a higher benefit  at 70. It was not meant for the wife to be able to collect benefits on her husband while he was not collecting. The law was passed in 1990 as part of the 1983 overhaul of the SS system and because Congress did not pass anything that was required from 1983 to 1990.  The law was passed this year to close the loopholes that were found in the 1990 law. 
Anonymous   |     |   Comment #16
My SS check will be significantly smaller in 2016.  I think many of Ken's readers are blissfully unaware of the fate which awaits their SS payments should interest rates rise significantly.  
Anonymous   |     |   Comment #19
I love how the government makes up these "Orwellian" names for it's corrupt programs......"Social Security" is a joke and was named so to trick the population.....Just like so many others. SS is a Ponzi scheme that is going to implode. The ONLY option is to end it and direct it to the elderly that are in poverty. Everyone else? Sorry.
Anonymous   |     |   Comment #20
My wife will be 64 in April, and I will be 64 in May. neither has taken benefits yet. At full retirement age she will be eligible for $950/month and I will be eligible for 2550/month. Sinse we were both born before 1954 we will be grandfathered in the resrticted account.  I am still working part time.  If we file for a restricted account how will we be affected