Advisers rethink retirement plans amid Social Security changes

Revisions for clients will need to account for income shortfalls

Oct 30, 2015 @ 12:11 pm

By Mark Schoeff Jr.

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Groundbreaking Social Security reform contained in budget legislation approved at breathtaking speed this week by Congress has financial advisers scrambling to rethink many of their clients' retirement plans.

The measure, passed by the Senate early Friday morning after being approved by the House earlier in the week, includes a provision that ends two popular Social Security claiming strategies: file-and-suspend and filing for a restricted claim of spousal benefits.

Both approaches generate higher benefit payouts for entitlement recipients and have been baked into retirement planning for many aging clients.

“We're going to have to take all of that, throw it in the trash can, and do the analysis all over again,” said Michael Kalscheur, senior financial consultant at Castle Wealth Advisors. “That's going to be a huge task for planners to try to figure out how to make up for that shortfall in income.”

Clients will have to tap other financial resources to fill in the retirement-funding gap, said Robyn Hari, principal at Diversified Trust. That may include cutting personal expenses, continuing to work or depending more on their children.

“They may not have much time to make up that difference,” Ms. Hari said. “They'll have to look at adjusting their standard of living or working longer.”

Clients who have not saved enough for retirement and were depending on the extra boost from Social Security with these particular spousal claiming strategies will be hit the hardest.

“For somebody who was tenuous, this may be the thing that pushes them over the edge,” said Don St. Clair, owner of St. Clair Financial. “They'll have to delay retirement or live on less.”

Changes to Social Security claiming strategies will take effect within six months of it being enacted. President Barack Obama is expected soon to sign the measure, which sets federal spending limits for the next two years and lifts the ceiling on the federal debt limit.

Who is affected by the new Social Security rules?

By Mary Beth Franklin
Assuming the Senate passes the legislation and President Obama signs it, these are the changes to look out for.
FILE AND SUSPEND
If you have already filed and suspended your benefits approximately May 1, 2016 — you can still request to file and suspend your benefits to trigger spousal or dependent benefits.
If you are 66 or older within the first six months after the law is enacted in order to trigger spousal benefits for your wife or husband and/or dependent benefits for a minor or disabled child, your family will continue to receive benefits on your earnings record.
After May 1, 2016 (approximate date), the rules for file and suspend will change.
No one will be able to collect benefits when the primary beneficiary files and suspends. And the person who files and suspends will no longer be able to request a lump sum payout of suspended benefits at a later date.
After May 1, 2016, the only use of file and suspend will be for those people who claimed reduced Social Security benefits before full retirement age. They will still be able to suspend benefits in order to earn delayed retirement credits of 8% per year between ages 66 and 70. But no one will be able to collect spousal or dependent benefits; known as auxiliary benefits; while the primary beneficiary suspends benefits.
RESTRICTED CLAIM FOR SPOUSAL BENEFITS
Married and divorced spouses who are already collecting spousal benefits worth half of their spouse's or ex-spouse's full retirement age benefit amount — can continue to collect those spousal benefits and switch to their own larger retirement benefit at age 70.
Anyone who is age 62 or older by the end of 2015 will retain the right to claim just spousal benefits when they turn 66 once the other spouse either claims Social Security or if that spouse had requested to file and suspend their benefits within six months of enactment of the legislation. Qualified ex-spouses who have been divorced at least two years can collect spousal benefits at age 66 even if their former spouse has not yet claimed benefits as long as that former spouse is at least 62 years old.
Anyone who is younger than 62 at the end of 2015 will not be permitted to collect just spousal benefits in the future. If they are entitled to both a retirement benefit on their own earnings record and a spousal benefit because they are married (or divorced after at least 10 years of marriage) to someone who is eligible for benefits, they will be deemed to file for both benefits at the same time and receive the higher of the two amounts. They will no longer be able to claim spousal benefits only.
IMPACT ON THE FOLLOWING GROUPS OF BENEFICIARIES
Workers who are 66 or who will turn 66 by May 1, 2016 can still file and suspend their Social Security benefits in order to trigger benefits for a spouse or minor child. They will still be able to request a lump sum payout of suspended benefits any time up to age 70 in lieu of earning a delayed retirement credit of 8% per year.
Younger workers will not have that option. If they suspend their benefits at 66, they can still earn delayed retirement credits. But no one can collect benefits on their earnings record during the suspension.
Spouses who are already collecting benefits on their mate's earnings record can continue to do so and switch to their own larger retirement benefits at age 70. So can spouses and qualified ex-spouses who are 62 or older by the end of 2015. They can still restrict their claim to spousal benefits. Those who are younger than 62 at the end of 2015 cannot collect spousal benefits only when they reach full retirement age.
Divorced spouses have the same right to collect spousal benefits only as described above depending on their age. Divorced spouses who are younger than 62 by the end of 2015 will not be able to collect only spousal benefits while their own retirement benefits continue to grow up to age 70.
Surviving spouses will continue to be able to choose to collect either a survivor benefit or retirement benefit first and then switch to the other benefit later if it would result in a larger amount. The legislation does not change the rules for surviving spouses.
Dependent minor children under age 18 (or 19 if still in high school) can collect dependent benefits worth 50% of a parent's full retirement age amount when the parent claims benefits or requests to file and suspend their benefits within six months of enactment of the new law. After six months, dependents can only claim benefits if the parent is actually receiving Social Security benefits.
The same rules as described above apply to disabled childrenwho were disabled before age 22. They can continue to collect dependent benefits for the rest of their lives while their parent is alive and survivor benefits worth 75% of their parent's full retirement age amount when the parent dies.

Once the reforms go into effect, no one who turns 62 in 2016 or later will be able to utilizing the claiming techniques. The original legislation was revised so that it would not affect payments to people who are already collecting benefits through file-and-suspend, according to congressional aides.

The fast implementation timetable has advisers clambering to get clients who are close to retirement to speed up their decisions on whether to do file-and-suspend.

“We've reached out to anyone who may be eligible in the next six months to do it,” said Blair Duquesnay, chief investment officer at ThirtyNorth Investments. “We want to make sure we don't miss anyone who may be able to take advantage of it.”

Jim McCarthy, managing director of Directional Wealth Management, also is reviewing his client database with an eye toward the expiration of file-and-suspend.

“We'll run the numbers and see if it makes sense to implement the claiming strategy,” he said.

Under file-and-suspend, a claimant can file for benefits at the full retirement age of 66 and put off receiving them until he or she retires at 70. Over those years, the benefit grows at about an 8% annual rate. Meanwhile, his or her spouse can claim the spousal benefit -- one half of the claimant's benefit at full retiremement age.

The strategy costs the Social Security Administration several billion dollars a year in revenue, according to estimates, and is seen as a “loophole” that benefits mainly the wealthy.

As congressional leaders and the White House cobbled together the budget agreement, negotiators required spending reductions to offset increases in federal spending caps. One of the areas targeted was Social Security.

The measure “closes several loopholes in Social Security's rules about deemed filing, dual entitlement and benefit suspension in order to prevent individuals from obtaining larger benefits than Congress intended,” states a summary of the bill.

But advisers say the impact of the reform will extend well beyond wealthy Social Security recipients.

“There are a lot of my clients who are nowhere near the 1% [of richest Americans] who are able to take advantage of this strategy,” Mr. McCarthy said.

Paul Auslander, director of financial planning at ProVise Management Group, said Congress will be criticized for the Social Security moves.

“There are a lot of Americans who rely on these strategies to pick up $700 or $800 a month, and that makes a big difference in their quality of life,” he said. “They'll be resentful.”

Usually changes to Social Security occur over years. This time around, it happened during backroom budget negotiations over the course of days.

“This is coming out of left field,” Mr. Kalscheur said.

Who is affected by the new Social Security rules?

By Mary Beth Franklin
Assuming the Senate passes the legislation and President Obama signs it, these are the changes to look out for.
FILE AND SUSPEND
If you have already filed and suspended your benefits
approximately May 1, 2016 — you can still request to file and suspend your benefits to trigger spousal or dependent benefits.
If you are 66 or older within the first six months after the law is enacted
in order to trigger spousal benefits for your wife or husband and/or dependent benefits for a minor or disabled child, your family will continue to receive benefits on your earnings record.
After May 1, 2016 (approximate date), the rules for file and suspend will change.
No one will be able to collect benefits when the primary beneficiary files and suspends. And the person who files and suspends will no longer be able to request a lump sum payout of suspended benefits at a later date.
After May 1, 2016, the only use of file and suspend will be for those people who claimed reduced Social Security benefits before full retirement age. They will still be able to suspend benefits in order to earn delayed retirement credits of 8% per year between ages 66 and 70. But no one will be able to collect spousal or dependent benefits; known as auxiliary benefits; while the primary beneficiary suspends benefits.
RESTRICTED CLAIM FOR SPOUSAL BENEFITS
Married and divorced spouses who are already collecting spousal benefits
worth half of their spouse's or ex-spouse's full retirement age benefit amount — can continue to collect those spousal benefits and switch to their own larger retirement benefit at age 70.
Anyone who is age 62 or older by the end of 2015
will retain the right to claim just spousal benefits when they turn 66 once the other spouse either claims Social Security or if that spouse had requested to file and suspend their benefits within six months of enactment of the legislation. Qualified ex-spouses who have been divorced at least two years can collect spousal benefits at age 66 even if their former spouse has not yet claimed benefits as long as that former spouse is at least 62 years old.
Anyone who is younger than 62 at the end of 2015
will not be permitted to collect just spousal benefits in the future. If they are entitled to both a retirement benefit on their own earnings record and a spousal benefit because they are married (or divorced after at least 10 years of marriage) to someone who is eligible for benefits, they will be deemed to file for both benefits at the same time and receive the higher of the two amounts. They will no longer be able to claim spousal benefits only.
IMPACT ON THE FOLLOWING GROUPS OF BENEFICIARIES
Workers who are 66 or who will turn 66 by May 1, 2016
can still file and suspend their Social Security benefits in order to trigger benefits for a spouse or minor child. They will still be able to request a lump sum payout of suspended benefits any time up to age 70 in lieu of earning a delayed retirement credit of 8% per year.
Younger workers
will not have that option. If they suspend their benefits at 66, they can still earn delayed retirement credits. But no one can collect benefits on their earnings record during the suspension.
Spouses who are already collecting benefits
on their mate's earnings record can continue to do so and switch to their own larger retirement benefits at age 70. So can spouses and qualified ex-spouses who are 62 or older by the end of 2015. They can still restrict their claim to spousal benefits. Those who are younger than 62 at the end of 2015 cannot collect spousal benefits only when they reach full retirement age.
Divorced spouses
have the same right to collect spousal benefits only as described above depending on their age. Divorced spouses who are younger than 62 by the end of 2015 will not be able to collect only spousal benefits while their own retirement benefits continue to grow up to age 70.
Surviving spouses
will continue to be able to choose to collect either a survivor benefit or retirement benefit first and then switch to the other benefit later if it would result in a larger amount. The legislation does not change the rules for surviving spouses.
Dependent minor children
under age 18 (or 19 if still in high school) can collect dependent benefits worth 50% of a parent's full retirement age amount when the parent claims benefits or requests to file and suspend their benefits within six months of enactment of the new law. After six months, dependents can only claim benefits if the parent is actually receiving Social Security benefits.
disabled children
who were disabled before age 22. They can continue to collect dependent benefits for the rest of their lives while their parent is alive and survivor benefits worth 75% of their parent's full retirement age amount when the parent dies.

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