By Robert Deschene, Esq.

Security CardPeople approaching retirement age rely in part on Social Security (SS) to maximize their retirement income, but they also face a labyrinth of confusing laws and regulations.

The dilemma: at what age is it best for you (or your spouse) to start collecting so you get the most retirement dollars? There are no easy answers to that question, and the questions just got more difficult.

New Budget Bill – Surprise!

Congress just enacted and the President signed into law a bipartisan budget bill designed, in part, to avoid another government shut-down.   Effective May 1, 2016, the new law makes major changes to the rules about when and how retirees can claim their SS benefits, and eliminates several planning strategies previously available to them to get more benefit dollars.

The Basics Stay the Same

Some basic rules stay the same.  In general, you can begin collecting SS as early as age 62, but your monthly payment will be much lower than if you delayed collecting until your “full retirement age,” which is between ages 66 and 67 (depending on the year you were born).   Once you start collecting then, your monthly payment amount is locked in, and will never increase (except for annual cost-of-living increases).   But if you further delayed collecting past your full retirement age, and wait until age 70 to collect, your monthly payment increases about 8% a year.

File-and Suspend, or “Having Your Cake and Eating It Too” is Kaput

One lucrative planning strategy no longer available after May was called “file-and-suspend.”  Say Tom and Jane both reached their full retirement age of 66, Tom intends to keep working until at least age 70, but Jane wants to retire now.  Each could start collecting on their own SS, Tom at $1500/month and Jane at $600/month, or $2,100/month.  Instead, Tom would file immediately to collect on his SS, but then “suspend” his right to collect.  Why?

If Tom waited to collect his own SS until age 70, his monthly payment amount would increase about 8% over the next 4 years, and at age 70, he would be able to collect $1980/month, rather than $1500.

Once Tom filed and suspended, Jane had the right as his spouse to collect on Tom’s SS account, and she immediately started collecting one-half of what Tom would have collected, or about $750/month.  Meanwhile, because she is not touching her own SS ($600/month), it would increase to $792/month by the time she reached 70.  At age, Jane would have collected about $36,000 on Tom’s suspended claim, and then Tom and Jane both would start collecting on their own SS, for a combined monthly income of $2,772, instead of only $2,100.

The new law eliminates your ability to maximize benefits under this “file and suspend” by requiring that Tom actually start collecting on his SS at age 66 before Jane can claim her one-half spousal benefit on his SS account.   The new law made several other changes that tighten up the filing rules.

Robert Deschene, Esq.

What You Need to Know … or Do

Why is it important that you know about these changes in the law.  First, since it doesn’t take effect until May 2016, there is a brief “window” for those who are at least 66 (or who will turn 66 by April 30) to get “grandfathered” in to the old rules.

Also, your financial advisor may have projected your estimated retirement income based on the old rules, and you may want to discuss the implication of these changes in the law.  SS was intended only to supplement other sources of retirement income, such as 401(k)s and IRAs, and you may have to adjust your planned use of 401(k)s and IRAs to offset the lost SS income.  You and your advisor also may have to reconsider whether it makes more sense – or less – for you to delay collecting SS until you reach age 70, when you will receive the maximum monthly SS payment.