If you’ve been reading the financial news or viewing stock market pages on the internet, you may have noticed headline banners announcing changes to social security rules that take affect after April this year. And you may be wondering if the changes will affect you.
Don’t worry, spousal benefits are not coming to an end. What will end is the ability for a spouse to collect spousal benefits if an older spouse is not collecting benefits yet. And a spouse not yet age 62 by January 1, 2016 can no longer claim “spousal benefits only” at Full Retirement Age (FRA) to allow her own benefits to grow until age 70.
Until April 29, an older spouse age 66 or more can “file and suspend” his or her benefits, and when the younger spouse age 62 or older in 2015 turns 66, she can file a restricted claim for spousal benefits and wait until age 70 to begin collecting her own benefits.
The “file and suspend” strategy has been a useful tool in a retiree’s financial toolkit since 2000. If you wait until age 70 to collect, your payments will be 32% higher than they would have been at age 66. And if one spouse implements that strategy, the other spouse can file a restricted claim and collect spousal benefits only between 66 and 70 that are equal to 50% of the other spouse’s benefits.
In 2000, Congress passed the Senior Citizen Freedom to Work Act, and that law allowed people to suspend their benefits in order to build delayed credits if they continued to work past full retirement age. Under the 2000 law, a spouse could start spousal benefits four years earlier than he or she could have before.
Now fast forward to 2015. As “file and suspend” with spousal benefits became more widely known and more people took advantage of it, Congress started thinking of it as a “loophole,” which they closed in the Bipartisan Budget Act of 2015.
Question: Does this mean I have to start taking social security at Full Retirement Age?
Answer: Full Retirement Age (FRA) is 66 for people born in 1943-1954 and gradually increases to age 67 for people born in 1960. The new bill does not prevent you from increasing monthly benefits by suspending them until you reach age 70. It only prevents spouses born on or before January 1, 1954 from receiving spousal benefits while you are suspending your benefits.
This change can have a substantial effect on your retirement plan. For example, if your expected monthly payments at age 66 are $2,600 each and if you were able to file and suspend and your spouse was able to begin collecting spousal benefits, she could collect $62,400 in benefits from age 66 to 70 ($1300 x 48 months). Unless you turn 66 before April 30th and file and suspend before April 29th, and your spouse was born on or before January 1, 1954, she can start her own benefits at age 66 or she can wait till 70, but she can’t claim spousal benefits while your payments are suspended.
Question: When does this change take effect?
Answer: The change becomes effective May 1, 2016. Friday April 29th is the last day to apply.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.