The recent changes to Social Security brought about by the 2015 Federal Budget Bill have removed two little understood, yet very powerful, benefit maximizing strategies that have been available to Social Security claimants since 2000.
To better understand this recent change it is important to understand how Social Security benefit levels are determined. Social Security benefits are paid monthly to those that qualify based on an individual’s primary insurance amount (PIA). An individual’s PIA is in term determined by the 35 years in which that individual earned the highest level of income.
Currently, an individual can begin to receive a reduced Social Security benefit at age 62. An individual who delays receiving Social Security benefits can realize an increase in benefits all the way to age 70. Waiting until age 70 can result in as much as a 32% increase in Social Security benefits.
The major financial incentive to delay claiming Social Security benefits led to two strategies for married seniors to maximize their Social Security benefits. These are known as File and Suspend and Restricted Applications.
- File and Suspend, allowed the spouse who had earned more over their lifetime to claim Social Security benefits and immediately suspend their benefits. This gave the higher income earning spouse the flexibility to maximize Social Security benefits by delaying taking his benefit while the lower wage earning spouse received a spousal award. This also allowed the high earner to claim retroactive benefits if the need arose.
- Restricted Applications, gave a married couple the option to allow one spouse to receive a spousal benefit based on his spouse’s Social Security application while delaying his own application to maximize their PIA.
Both of these strategies will be phased out by the most recent changes to Social Security.
The loss of these powerful Social Security planning tools has led many individuals nearing retirement age to rethink their strategies for wealth management and an increasing number have opted to delay retirement entirely in order to maximize their available retirement plan assets.
With growing uncertainty in the market, devaluation of core assets such as real estate, and the loss of key Social Security planning tools, the need for an effective wealth management strategy and comprehensive estate plan have never been higher.
Consult your estate planning attorney for further information.