Payout options for retirees are changing as early as December 31, 2015. The most recent budget session in Congress resulted in the elimination of two strategies that helped millions of seniors increase monthly income during retirement. These changes are implemented almost immediately, and can affect long term retirement strategies, as it applies to receiving social security payments. The two options of “File and Suspend,” and “File and Restrict,” have been eliminated.
These two strategies, when combined, helped couples gain thousands of dollars in additional funds during the early years of retirement. With 26% of retirees depending solely on social security funds, losing $24,000 or more in benefits could leave these families struggling. This is especially true for those close to retirement, but don’t hit the age requirements by the deadlines.
The good news is those who meet age requirements, will not be impacted by the changes. This adjustment to social security payouts is the second in the last five years and congress could just be getting started, given the threat of social security running out of money. It is expected that more changes are coming down the pipeline and future recipients are likely to carry the brunt of these changes.
Common Strategies Used to Maximize Benefits, There Are Changes
File and Suspend is a strategy that allowed the filer to apply for benefits at the age of 66 (or full retirement) and then suspend payments. They could then continue to grow their benefits while allowing spouses and dependent children to claim on their record during the suspension. The older spouse could begin receiving benefits at a later time, with a higher start rate. Given that payment grows at 8% a year from 66 to 70, this could add up to significantly higher payments for the filer.
For example: If a filer is scheduled to receive at a payment of $1,200 a month at the age of 66, it has the potential to grow to $1,500 by the time they reach 70, if they wait to take payments. That’s an annual increase of $3,600 in the first year. While waiting to receive benefits, the filer’s spouse could collect the spousal benefit, which is up to 50% of the filer’s payment, as long as they were 62. In the above example, that would be up to $600 a month for those same four years or nearly $30,000. It’s easy to see how this strategy is significant enough to impact the couple’s standard of living for the first several years in retirement.
What is Changing
The File and Suspend is eliminated as of April 30, 1016. After that time, those who have not reached full retirement age will no longer be able to use this strategy to increase social security payments. Those who are 66 by April 30 will be able to file and suspend payments, which can be restarted at any time. Applications do not need to be submitted by April 30th. Just reaching full retirement age will qualify you for the benefit in the future. Those who are younger will not be able to use this strategy going forward.
If the filer’s payments are suspended, spouse and dependents payments will also be suspended.
File and Restrict is grandfathered for those reaching the age of 62 before December 31, 2015. This strategy allowed the spouse to smaller spousal payments early in retirement and then convert to their own higher paying benefits at a later date. This strategy will no longer be available, and the filer must choose one payment that will not be changed.