LUTZ BUSINESS INSIGHTS
Social Security: The New Rules
JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL
On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015. Much of the premise of this budget deal was to avoid a government shutdown; however, just like all bills in Washington, the devil is in the details.
One of the Act’s biggest features has nothing to do with temporarily funding the government to keep the doors open. The section will focus on various Social Security claiming strategies and the elimination of certain options for retirees. It’s important to note that this does not impact current claimers, only future claimers when the new rules take effect. While there are many scenarios specific to the individual, we wanted to focus on the main changes we see in practice today.
Limitation of “File and Suspend”
In order to understand the changes, it’s important to understand what could have been done under the old regime (which started in 2000). A married worker is entitled to receive either a spousal benefit or a worker’s benefit based on their own earnings record. So, an individual who filed a claim between 62 and full retirement age would be deemed to have filed for the larger of the two benefits. At full retirement age (let’s assume 66, as this varies a bit), a worker was allowed to file for social security based on their own earnings and immediately suspend those benefits. So long as his or her spouse was also at full retirement age and had at least suspended their own benefit, it allowed for the spouse to receive the spousal benefit (generally half of the other spouse’s full retirement benefit) for up to four years in this example. It would also let their own worker’s benefit accrue an 8% deferral credit between their full retirement age and 70. At 70, the spouse receiving the spousal benefit could then switch to their own benefit which would have increased the deferral credit.
This strategy was often called “file and suspend” because the worker would file for their benefit and suspend receipt until a later date (typically age 70). However, the filing allowed for spouses and dependent children to file for their spousal or dependent benefits.
How it will work now
The new legislation now eliminates the opportunity to switch from spousal to own benefits at a later date. It has basically taken the “deemed filing” concept used at age 62 (deemed to file for the larger of the two benefits) all the way to age 70. NOTE: there is a grandfathering provision, which allows anyone who has reached the age of 62 by the end of 2015 to take advantage of the current rule. Those who are currently receiving benefits are not impacted at all.
Now, when a worker files for social security and suspends their benefit to earn the 8% retirement credit per year, they not only suspend their own benefit but any and all benefits payable to other individuals based on their earnings record. So now you cannot switch benefits, you either start it earlier or delay them all until later.
Lump-Sum Retroactive Reinstatement
A lesser used strategy was also killed by the new law. As mentioned, under the prior rules at full-retirement age, an individual could delay benefits in order to earn the delayed retirement credits until age 70 by filing and suspending their benefit. If they later changed their mind (let’s say because of a terminal illness), they could retroactively claim all benefits going back to the date of the original suspension.
Under the new rules, one doesn’t have the option to reinstate benefits going back to a prior month such as the suspension date. You can only resume the suspended benefits in the next subsequent month after the request was made.
There are a handful of other strategies that the new law effects that weren’t covered here, so the biggest takeaway would be if you are 62 years or older and have delayed taking social security up until this point, you need to consult your advisor by the end of the year to determine your next steps. For those currently taking benefits, you are probably not affected. For those younger than 62 future filing may be simpler, but it will still be important to figure out the right strategy for you by working with your advisor.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.
ABOUT THE AUTHOR
JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL
Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.
AREAS OF FOCUS
- Investment Advisory Services
- Comprehensive Financial Planning
- Business Owner Planning & Succession
- High Net Worth Families
AFFILIATIONS AND CREDENTIALS
- CERTIFIED FINANCIAL PLANNER™
- National Association of Personal Financial Advisors, Member
- Financial Planning Association, Member
- BSBA in Economics and Finance, Creighton University, Omaha, NE
- St. Augustine Indian Mission, Board Member
- Nebraska Elementary and Secondary School Finance Authority, Board Member
- St. Patrick's Church, Trustee
- Mount Michael Booster Club Board
- Lutz Gives Back, Committee Chair
- March of Dimes Nebraska, Past Board Member
- A 100-Year Bet Gone Bad
- Am I Ready to Retire? Finding Your Sweet Spot
- 5 Retirement Strategies for Small Business Owners
- Outsmarting the Ivy League?
- An Investor's Year-End Wrap Up & Tax Prep
- Nobody Knows Anything
- Add "Brexit" to the Long List of Uncertainty
- Financial Planning for College Grads
- Fight or Flight - Lesson Learned
- Social Security: The New Rules
- Putting Volatility in Context
- The Asian and European Fronts
- Bubble Looming or a Bubble Popped
- Re-Emerging Markets?
- A Market Perspective
- Timing is Not Everything
- "Yellen" at the Fed
- Mind What Matters...Focus Efforts On What You Can Control
- What to do With a Financial Windfall
- Love Indexes - Hate the Indexes
- Do I Own a Market?
- A Practical Primer On Volatility
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