Social Security headaches hit some baby boomers hard
By Susan Tompor, Detroit Free Press Personal Finance Columnist 5:40 p.m. EST November 30, 2015
New restrictions on spousal benefits will affect married women and divorced spouses. Baby Boomers who are 66 by May 1 need to notice new rules that were included in the Bipartisan Budget Act of 2015.
Financial advisers are working with clients to adapt to changes for file-and-suspend strategies.
If you’re 62 or older by the end of 2015, you can still file a restricted claim of spousal benefits at 66.
Some younger Baby Boomers might have to save more or work longer to fill the gaps.
Want to get baby boomers and their parents grumbling about Social Security? It’s been easy to do that lately.
First, retirees won’t see any bump in their Social Security checks in 2016 for a cost-of-living adjustment. We’ve seen this happen twice before — 2010 and 2011 — when retirees have not seen any inflation-adjusted boost to Social Security checks in the New Year.
But even more grumbling is taking place among younger baby boomers who have been studying strategies for when it would be in their best interest to claim Social Security benefits, particularly for married couples.
Financial experts said that some couples who used the “file and suspend” strategy — now being phased out for younger boomers — could add $50,000 or more to their overall Social Security payout throughout their lifetimes. The longer you lived, of course, the more money you’d generate. Some planners had seen scenarios where the overall gains hit well into the six figures for people who lived into their late 80s or early 90s.
But this strategy, which involves claiming but suspending benefits for one spouse so the other spouse can collect a spousal benefit, will apply only to those who have already taken advantage of it. If someone who is 66 years old or older by May 1 doesn’t take action soon, they’re out of luck. After April 30, you can no longer apply for file and suspend.
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The change was tucked away this fall into the Bipartisan Budget Act of 2015. Baby boomers and others are gradually learning more about what it really means, as financial planners get the word out. But the bottom line is that it’s going to make it far harder beginning next year to use some once-clever claiming strategies.
“They called them loopholes,” said Scott Rooney, a registered representative for InvestWise Financial in Bloomfield Hills who has given seminars on Social Security including some last spring during Money Smart Week in Michigan.
“We just viewed them as those were the rules and people could take advantage of them if they knew about them,” he said. “You’d be amazed at the difference simply by using one strategy versus another.”
The new rules greatly influence how people who are younger than 62 can claim benefits in the future. Baby boomers who are 66 or nearing 66, in particular, might want to pay close attention, as they continue to have some options for a few months. Some might want to take action soon.
Michael Bullis, branch manager and financial adviser for the Raymond James office in downtown Royal Oak, said baby boomers who will be 66 by April 30, 2016, should do more research quickly, if they’re not already claiming Social Security benefits.
He is advising clients in that 66 age group to file and suspend before this provision in the rules goes away permanently.
Age 62 is the earliest one can claim retirement Social Security benefits but people can wait as long as age 70 to claim the maximum monthly benefit. File and suspend can be used at age 66 where someone files for benefits but then suspends receiving benefits.
Why did people do this? By filing and suspending at 66, a senior is able to delay taking benefits until age 70 and see those benefits grow at 8% each year. At the same time, the person’s spouse could then claim spousal-only benefits and collect half of the husband or wife’s full benefit at age 66. As a couple, the overall Social Security payout could be far larger than just having both people wait until age 70 to claim benefits.
Franklin said the Social Security Administration had yet to give any official guidance on the new rules shortly before Thanksgiving. Nothing was posted on the Social Security Administration website early last week.
Franklin said she too would strongly urge someone who is 66 now or turns 66 by April 30, 2016, to take advantage of the short, limited window and file and suspend by April 30. She noted that people who turn 66 on May 1 would also be eligible to claim Social Security in April and therefore are grandfathered under the existing rules if they file and suspend by April 30, 2016.
“You have to do it by April 30,” Franklin said.
She noted that one can file and suspend at any point at 66 or later up to age 70 when delayed retirement credits end. Anyone who is eligible may want to do this if only to lock in the lump sum option that is going away after April 30, Franklin said.
“However, everyone gets one choice, so if you plan to file a restricted claim for spousal benefits, don’t file and suspend,” she said.
Some planners say the need to understand the various rules is becoming even more important during the next few months, especially for those who still have options.
Age 62 is not considered the full retirement age, and people receive a lower monthly benefit if they claim at 62. In many cases, the benefit is reduced by as much as 30% if you claim at 62 instead of the full retirement age.
The full retirement age — which offers better monthly benefits than at 62 — would be 66 for those born between 1943 and 1954. Someone born in 1960 or after must wait until age 67 for the full retirement age.
Folks born from 1955 through 1959 face a crazy quilt of full retirement ages. Someone born in 1955 must wait until age 66 and 2 months for a full retirement age.
The file and suspend idea wasn’t the easiest strategy to figure out but financial planners and others had rolled out seminars, developed software and cranked out books explaining the file and suspend idea and how it was key to run through some scenarios if the couple could wait until at least age 66 to claim benefits.
Christopher W. Frayne, portfolio manager for Southfield-based Sigma Investment Counselors, said typically Social Security benefits remain a critical part of many people’s plans for generating income during retirement.
“The benefit of filing and suspending is that it allows others to collect on your record,” Frayne said.
What if you filed and suspended taking your benefits at 66 but then needed the money say when you turned 67 or 68? Maybe you found out you had a terminal illness later? If you already filed and suspended benefits, you’d qualify for a lump sum dating back to age 66. And then you’d be able to claim benefits going forward as if you were age 66.
That lump sum payout can be attractive even for single seniors who might be able to live on their savings during their early retirement years but then want some assurance of a lump sum if they run into serious health issues.
Franklin said the lump sum option, which can be used for any reason, is particularly valuable to singles because they have no spouse to collect survivor benefits.
The baby boomers who are most upset about the new rules, of course, are those who ran some numbers earlier but maybe turn 66 in June or July and just missed out on their chances to use file and suspend any more.
After May 1, 2016, no one would be able to collect spousal or dependent benefits while the primary beneficiary suspends benefits. People who had already triggered this strategy and had been able to use it by April 30 would continue to benefit by the strategy, though.
The strategy, which some said wasn’t used by most seniors, was certainly getting more publicity as more baby boomers moved well into their 60s.
Some planners say Congress was concerned about the long-term cost, particularly as more people moved closer to 66 and could opt for the strategy.
Eleanor Blayney, consumer advocate for the Certified Financial Planner Board of Standards, said typically the file and suspend strategy was designed to maximize overall benefits to a married household.
“Congress deemed this as a kind of a loophole. So they shut it down and they shut it down fast,” Blayney said.
Now, experts say it’s even more important that people who are 62 by the end of 2015 or age 66 by April 30, 2016, take time to review some of their options. If you turn 62 by the end of 2015, for example, you do retain the right to file a restricted claim for spousal benefits in the future. This also applies to someone who turns 62 on Jan. 1, 2016.
Franklin noted that anyone who is 62 by Jan. 1, 2016, can claim spousal benefits only when they turn 66, assuming their spouse is already claiming Social Security or was old enough to file and suspend by the April 30, 2016, deadline. Filing a restricted application allows you to claim only your spousal benefits — worth half of the other spouse’s full retirement age amount — while your own retirement benefit continues to grow by 8% per year up to age 70 when you would switch to your own larger benefit.
Yet, people in their late 50s or just turning 60 or so do not have any such options.
Where do you find help? Plenty of financial advisers are contacting their clients and suggesting that a review take place. Even if you’re a younger boomer, it’s still important to consider other options than just going through the motions and claiming Social Security benefits at age 62.
The Consumer Financial Protection Bureau has a new “Planning for Retirement” online tool that can give some guidance. The tool can be found at www.consumerfinance.gov/retirement. The site only offers an estimate, though, and does not use your Social Security earnings record.
The Social Security Administration has an online Retirement Estimator at www.socialsecurity.gov/retire that reviews various options, too.
What’s essential is that consumers evaluate the trade-off of claiming benefits at 62 or waiting until they’re older.
“Deciding when to start claiming Social Security benefits is one of the most important financial choices a consumer will make,” said Richard Cordray, director of the Consumer Financial Protection Bureau in a statement.
About two-thirds of the nearly 40 million Americans age 65 or older who receive Social Security benefits depend on Social Security for half or more of their retirement income. That’s because many people no longer have a traditional pension check.
Many people still claim retirement Social Security benefits at age 62. In 2013, nearly 46% of claims were submitted at 62.
Contact Susan Tompor: 313-222-8876 or firstname.lastname@example.org. Follow her on Twitter @Tompor.