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Big changes to Social Security

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January 29th, 2016

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The Bipartisan Budget Act, which was passed by Congress last October, includes the biggest changes to Social Security in over a decade. The new regulations are effective for 2016, so if you are retired or approaching retirement, you should be sure you understand the changes and how they could affect your retirement income. 

If you’re already collecting Social Security, there’s no need to worry. You are not affected by the new rules and your benefits won’t change. For everyone else, here’s what you need to know.

‘File and suspend’

One significant change is the elimination of the so-called “file and suspend” strategy. Since 2000, married couples have been taking advantage of this strategy to boost benefits. This “loophole” of sorts lets the higher-earning spouse file for Social Security but then suspend his or her payments until age 70, allowing the benefit amount to grow. Meanwhile, the other spouse can begin collecting spousal benefits immediately. 

Terry Seaton, a Florida financial planner who works on the financial literacy committee of the American Institute of Certified Public Accountants (aicpa.org), says that for most people, file and suspend is no longer an option. But, if you are already at full retirement age or will reach it very soon, then you should take immediate action.

“There’s really only one action item—if you are somebody who is already at full retirement age or you are going to reach full retirement age before April 29, then you should probably file and suspend so you preserve the option of your spouse getting a benefit,” Seaton says. “If you haven’t gone into that file and suspended status [by the deadline], then you lose the ability to do that in the future.”

Restricted filing option

The second change is the end of the restricted filing option. Using this strategy, a married person could file for spousal benefits at full retirement age but delays his or her own benefits until age 70, allowing them to grow for a few more years. Seaton says people who turned 62 by January 2, 2016, will be grandfathered in and can still do a restricted filing. 

“If your cash flow projections have been assuming you could benefit from one of these strategies, figure out what the shortfall is and then look at possibly delaying retirement or working part time in retirement,” Seaton says. “Maybe you only take one vacation a year instead of two; there are all kinds of things you can do to adjust expenses or income.”

The new Social Security rules have been making negative headlines because some people will lose money. But, Jamie Hopkins, a professor in the Retirement Income Program at The American College of Financial Services (theamericancollege.edu), says these changes are ultimately a good thing because they will help to strengthen the Social Security system for future generations.

“This is going to be the first step of many in fixing the Social Security system, so we don’t hit 2033 and have to decrease benefits by a quarter,” Hopkins says. “That would be devastating. This is costing some people, say, $50,000, but that is for somebody who has the maximum Social Security benefits, and they were earning $120,000 for 30 years, so not somebody who is relying on Social Security anyway.”

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