Social Security Planning Update – A Loophole is Closed

During the financial planning process here at Wiser, we use planning software to determine the best strategy to take Social Security benefits. Social Security can be applied for and received in many different ways. A lot of clients assume that they should take it as soon as possible, but for many this option could hurt them in the long run. Assuming you did planning, a common way to take Social Security for a couple was called file and suspend. The file and suspend method worked like this:

A client, Bill, files at his full retirement age of 66, but suspends actually taking the benefit. At his full retirement age his benefit is $2,000 a month, but by delaying to age 70, it increases by 8% per year. Since he filed, however, his wife, Betty, who is also at her full retirement age of 66, is eligible to claim a spousal benefit of $1,000 per month (50% of Bill’s benefit). She would collect this money for four years until she turned 70, and then take the greater of her spousal benefit or her own benefit.

This strategy of claiming Social Security came about in 2000 when Congress passed the Senior Citizens Freedom to Work Act. The purpose of this Act was for those working to be able to stop benefits and delay retirement credits. Our example scenario was an unintended loophole, but now Section 831 of the Bipartisan Budget Act of 2015 has taken it away. In the example above, Bill can still defer his social payments and defer credits, but no payment can be paid out to his spouse or dependents until he takes his benefit.

There was very little warning of this change. We first learned about it via an advisor-to-advisor blog, and even then the information was very vague. Financial planning software companies are also struggling to keep up with the change. Our software still lists the file and suspend option, but with a note of the legislative change. For those that have already filed and suspended and are taking the spousal benefit, or are eligible to do so by April 29, 2016, you are grandfathered in.

In reviewing a sample of our retirement plans on file, we have determined that there is a small drop in the probability of not running out of funds by age 95 when accounting for this new ruling. This means that to maintain the exact same probability, income during retirement has to be reduced, assuming the client cannot save more or work longer to compensate for the reduced Social Security benefit. This whole issue is a reminder that financial planning cannot be a static event. A financial plan has to be thorough and updated at least annually, as changes in personal circumstances – or in this case, legislation – can affect the previously projected outcome.  However, our plans result in a range of probabilities we call the confidence zone. Most plans are staying within the confidence zone after adjusting Social Security benefits for the new legislation.

Have more questions? Email me at casey@wiserinvestor.com or use the Contact Us page.

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