The government giveth, the government taketh away
Some new changes in how Social Security benefits are claimed will take effect at the end of April 2016. And this is going to have a big impact on how retirees plan for their retirement.
It’s also going to have a very large impact on how retirees will make sure they have enough income to meet their expenses and to live the lifestyle that they want in retirement
The two biggest changes that will go into effect are:
- The elimination of the File and Suspend Strategy for Social Security claiming and
- The elimination of the Restricted Application Strategy
I’ve written on this before in a past blog post, but just a quick recap…
File And Suspend Strategy
File and Suspend is the strategy where a person files for benefits at their full retirement age, which is usually 66, and then they suspend those benefits and don’t receive any payment from Social Security on their own benefits.
This seems like an odd thing to do. Why file for benefits and then not claim those benefits?
Because it allows their spouse to begin drawing a spousal benefit off them. You see, a person cannot draw their spousal benefit unless their spouse has already filed for benefits.
So when, say a husband, files and suspends when he is 66, this allows his wife to draw a spousal benefit off him.
At the same time, since he has “suspended” his benefit, it allows it to delay and increase by 8% each year up until age 70. He then would start drawing at that age.
The big benefit was the husband, in this example, gets a higher benefit through delaying. But at the same time the married couple is still able to get some income from Social Security by having the wife draw a spousal benefit.
Pretty ingenious actually.
The new change that is going into effect after April 30th 2016 is that if a person files and then suspends their benefits they are deemed as having not filed at all. This means their spouse can’t claim spousal benefits off them while they let their own benefit delay and get bigger up until age 70.
Restricted Application Strategy
The Restricted Application strategy was where a person, once they reached full retirement age which is usually 66, would file for spousal benefits and not for their own benefits. In other words they “restricted their application” to spousal benefits only
This allowed their own benefits to roll up and increase as if they weren’t being drawn. They were essentially delaying their own personal benefits, letting them grow 8% every year up until age 70. Then when they reach age 70 they would switch over to their own benefit that had now increased due to the delaying factor.
The big benefit: They got to delay (and increase for the future) their benefits while simultaneously drawing some benefits from Social Security.
The new change will not allow this strategy for anybody that did not turn 62 by the end of 2015.
5 Ways These Social Security Changes Will Affect Retirees
These changes are going to have an impact on retirees due to less lifetime income they can receive from Social Security. Here are five ways that retirees will be affected by these changes.
#1: You May Have To Work Longer
One of the big benefits of the File and Suspend and Restricted Application strategies was that it allowed you to get some income coming in from Social Security while at the same time technically delaying your own benefits up until age 70.
It really was the best of both worlds. Delay your benefits so they will be bigger. But also receive some benefits in the meantime.
In other words they weren’t really 100% delaying Social Security benefits. They were receiving some (not all) benefits during that delaying time.
Since this is no longer going to work the only alternative to increase your Social Security payment is just to simply delay it. And you can delay drawing your benefit from when you are first eligible at age 62 up until age 70. Every year you delay it will be larger.
But in order to meet your expenses in the meantime while you are delaying, you’re going to have to have an income source. And for a lot of people that’s probably going to mean they may have to work a little bit longer, since “wages” from work are a good income source.
#2: You May Need Alternate Strategies To Fund A Delayed Benefit
If you are already retired, or perhaps working additional years is just not an option for you, then you’re going to need alternate strategies to fill in the gap between your income and expenses.
The old, soon to be expired strategies allowed you to get some benefits from Social Security while still letting your own benefit increase for a later date. Since that option is going away you will need another source of income if you decide you want to delay drawing your Social Security benefits.
For many people this may mean they make withdrawals from savings to pay during the years that they were going to use the Restricted Application or the File and Suspend strategy.
This may include having money in a CD at the bank that you can withdraw from during these years if you’re still determined to delay your Social Security benefit.
For other people it may mean purchasing an annuity that begins paying income when you turn full retirement age, which is 66 for most people.
Whatever options you choose, if you want to delay your Social Security benefits, you will need alternatives to pay you income during that delaying period.
#3: Retirement Income Planning Will Become Even More Important
The changes in Social Security have essentially lowered the amount of lifetime benefit that you can receive from it. This is because you won’t be able to take advantage of the Restricted Application and File and Suspend strategies
What this means for you is that planning for your income in retirement is now going to be even more important. You no longer have as much of a safety net from Social Security as you used to have.
Now it is going to be more important than ever to look at all the dollars in your portfolio and find a smart withdrawal strategy. This strategy must meet your needs and cover your retirement expenses. Not just cover the basic expenses. But also cover what it takes to live the retirement lifestyle you have always wanted.
Before the changes in Social Security it was easier to meet your retirement expenses. That’s because through smart planning strategies you could have some income coming in from Social Security, while at the same time getting the benefit of higher income in the future from delaying your own personal benefit
Now that has gone away you’re going to have to rely on your own savings even more so. This means you have to use your savings and investments more efficiently, with a very smart plan in mind to help make your money last longer in retirement.
That’s where retirement income planning comes in.
And now it is more important than ever that people planning for retirement take the time to build a simple income plan so that they can spend more confidently and worry less about running out of money in retirement.
#4: The Consequences Of Buying The Wrong Annuity Just Got Worse
One of the primary benefits of an annuity is that they can provide lifetime income. That’s why they are such good retirement products
When people retire income becomes very important.
And you can take that a step further by saying that reliable guaranteed income becomes even more important.
That’s why people look to annuities often times when they are planning for their retirement. And there are different kinds of annuities available on the market.
But some annuities were made to do some things better than other things. They weren’t all designed to maximize income.
For example some annuities are specifically designed to increase the death benefit and are usually most beneficial to people that cannot qualify for life insurance at older ages.
Another example…Other annuities are specifically designed for conservative growth potential and they may not even have income rider guarantees.
And yet another example… Some annuities are designed to help pay for long-term care.
In other words one annuity does not solve all problems.
With the new Social Security changes, if a retiree purchases the wrong kind of annuity that does not meet an income need (assuming they have an income need) then the consequences of that decision are going to be greater.
You can’t expect Social Security to offer as much in lifetime benefits now that some claiming strategies are being expired. If you have an income need, you better purchase a good annuity that is specifically designed to maximize your income when you need it.
So understanding the purpose of an annuity before you purchase it is much more important now than ever before. (Hint: It was always important to know the purpose, but the stakes are higher now.)
And when you’re looking at different annuities that guarantee you a certain level of income at some date in the future, make sure that you understand how much they’re going to guarantee to pay you in actual dollars.
“Roll-up rates” are not a real interest rate that you’re earning on your money. Instead, if income is your primary need and purpose for purchasing an annuity, make sure your adviser shows you the amount of income it will guarantee to pay you at the date in the future when you want it to start paying you income.
Have a couple of different annuity options to look at and compare. All other things being equal it is better to stay with stronger A-rated companies. An independent financial advisor will be able to check out multiple insurance carriers to help find you the best product.
And make sure that you understand the basics of how the annuity works. If you don’t have a basic idea of how the annuity is benefiting you, you will be prey to future unscrupulous salesmen.
You could have annuity that works perfectly for you inside your overall retirement plan. But if an unethical (or even un-qualified) salesman comes along, they may convince you to exchange that annuity for the new one he is offering.
If you don’t understand the basics of how your annuity works it will be much easier for someone to come along later and talk you into a different annuity (or investment) that doesn’t work as well in your overall plan.
So understand at least the basics of how an annuity benefits you. It can be as simple as this:
“My annuity guarantees to pay me “X” dollars beginning 3 years from now. This will meet my income and expense needs that I have calculated. It would probably not make sense for me to exchange this for another annuity that did not guarantee me at least this amount of income 3 years from now.”
That’s all there is to it.
#5: Managing Downside Risk In Your Portfolio Just Became Even More Important
The new Social Security changes will be going into effect soon. That means, obviously, that you will not be able to get the extra lifetime benefits from Social Security that the File and Suspend and Restricted Application strategies gave people.
This also means that you will have to rely on your savings and investments to an even greater extent now to fund your retirement expenses.
One way that retirees fund their retirement expenses is through making periodic withdrawals from their portfolio.
Everyone knows that portfolios invested in the market can go down in value when the market has a correction.
Pulling money from a portfolio at the same time that the portfolio is going down in value due to a market correction can have a very negative impact on that portfolio.
In fact, in some cases it can be very hard for the portfolio to recover from the duel effects of a market correction coupled with simultaneous withdrawals from it to fund retirement expenses
For a good illustration imagine somebody that retired in 2007 and they had $1,000,000 in their portfolio. They were thinking about withdrawing 4% from it every year going forward. So they start drawing out $40,000 from this portfolio.
And then the next year in 2008 a market correction occurs and their portfolio drops by, let’s say, 30%.
In a case like that the retirees thought they had enough money. They were withdrawing the conservative 4% withdrawal amount from their portfolio. But the market correction took out 30% of their value. And it can be very difficult for their portfolio to recover from that.
Since retirees are going to have to become more dependent on their own savings and investments to fund their income needs in retirement, it is going to be more important than ever that their portfolio is managed in such a way as to help minimize and manage the downside risk inside that portfolio.
The general rule is that the better a person’s portfolio performs in the early years of their retirement the more likely they are going to have their funds last longer, perhaps even the rest of their retired years.
And on the flip side, if a retiree’s portfolio performs poorly in the early years of their retirement it is going to be harder for that portfolio to last for the rest of their retired years.
And that can be seen in the very extreme, yet all too real, example of what occurred to people that retired 2007.
Many had a portfolio invested in the market. Many didn’t manage the downside risk and have measures in place to help limit some of the losses that occurred in 2008.
Compare this to someone that retired at the beginning of 2009. If they had a portfolio invested in the market at that time it was about to experience a strong bull market.
The bottom line is no one knows if (or when) the next stock market correction may occur. So it is important for retirees to help manage the downside risk in their portfolio.
With the changes in Social Security that will be rolling out soon, it’s more important than ever to help manage the downside risk in their portfolio
Conclusion – And Action Steps
I hope that helps, and I hope that you are taking steps to help overcome these Social Security changes.
Here are 3 action steps to help you make better retirement decisions in light of these Social Security changes:
- Look at your Social Security statement. Determine when you should begin drawing benefits. If you are married do this with your spouse to determine if it would be a good idea to delay your benefits to a later age. Many financial advisors have access to software that looks at many different variables to help you make a better Social Security claiming decision. Take advantage of this information
- If you purchase an annuity for income purposes, make sure your financial advisor shows you at least 3 different annuity options to pick from. Let the insurance companies compete for your business. An independent financial advisor can shop around for you to help you find the best annuity. Focus on the income they guarantee to pay you.
- Understand the risk that your portfolio is currently taking. Try to avoid common investing mistakes. Download my ebook that goes over the Top 7 Investing Mistakes Baby Boomers Make. It will help.
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