Congress recently agreed on some changes to Social Security benefits, in an attempt to reduce the deficit, and avoid a shut-down. These changes are expected to save billions of dollars for the government over time.
Two Social Security filing strategies used by married couples to enhance their joint benefit amount are being phased out.
If you are not at least age 62 by the end of this year you cannot “file-and-restrict.” This had allowed an individual who is at least full retirement age to limit or “restrict” the benefit they wish to receive to just their spousal amount, and delay the start of their own benefit. At age 70, they then switch to their own benefit. Assuming the current full retirement age of 66, this could result in an amount that is 32% larger.
The other disappearing strategy is called “file-andsuspend.” Under file-and-suspend your partner can qualify for a spousal benefit based upon your record even though it is in “suspension,” i.e. Social Security is not sending you a monthly check. If your benefit remains suspended from full retirement age until you turn 70, it can be as much as 32% larger.
IMPORTANT DEADLINE: The last day to file-andsuspend and enable a dependent to receive a benefit based on your record is April 30, 2016. However, what’s not clear yet, is whether BOTH partners have to meet this filing deadline.
Also, the ability to “suspend” your benefit at full retirement age will still be available after April 30th. However, if someone else- a spouse, child, or parent- is receiving a Social Security benefit based upon your record, their checks will also be suspended, until you begin to collect.
NOT CHANGED: Any couples who are currently using either file-and-suspend or file-and-restrict may continue to do so.
DIVORCED WOMEN TAKE A BIG HIT!
While the above two claiming strategies are being phased out, the budget act is going to have a serious and more immediate impact on anyone who is divorced. Starting January 1, 2016 a divorced spouse is no longer eligible for a benefit based upon her/his “ex”, unless and until, their former partner has filed for Social Security.
This has not been the case since 1983 when Congress specifically changed the existing law! That year, Congress specifically stated that, assuming a divorced spouse meets the requirements, she/he is eligible for a benefit based upon their former partner’s record whether or not that individual has started receiving Social Security: Independent entitlement of divorced spouses allows a divorced spouse, who is age 62 or over, and who has been divorced for at least 2 years, to receive benefits based on the earnings of a former spouse who is eligible for retirement benefits, regardless of whether the former spouse has applied for benefits or has benefits withheld under the earnings test. NOT ANY MORE !!
Divorced women will be especially hard-hit by this. First, on average, women tend to earn less. Estimates range from 77% (White House) to 84% (Pew Research Center) of what men earn. In addition, women spend significantly more time out of the workforce than men, primarily due to care giving responsibilities for children and/or other family members.
Together, lower wages and more time out of the paid workforce result in a lower Social Security benefit based upon a woman’s own earnings. According to the Social Security Administration, in 2013, the most recent year available, “the average Social Security income received by women 65 years and older was $12,857 compared to $16,590 for men.” If a divorced woman can receive a higher benefit based upon her ex-spouse’s earnings, it can make a big different in the lifestyle she can afford.
Unfortunately, based upon the budget act, if a 62year old divorced woman was planning to file for Social Security benefits next year, she might have to wait 8 years – if her ex waits until age 70, before she qualifies for her spousal amount.
You should plan to speak to your financial advisor about these changes, as it can have a significant impact on the cash flow you will have available, and when you can plan your retirement date. If you are nearing retirement, you may need to make some significant changes to your calculations.
Securities and investment advisory services offered through Voya Financial Advisors, Member SIPC. Derby Financial & Associates, LLC, is not a subsidiary of nor controlled by Voya Financial Advisors.
Sandy K. Derby, CFP®, ChFC™ has been in the financial services industry since 1989. She has been selected as one of America’s Top Financial Planners by Consumers Research Council of America. Sandy is President of Derby Financial & Assoc. LLC, where our goal is to help women become financially secure and independent, through comprehensive financial planning. Sandy can be reached at sandykderby@ derbyfinancial.net or .
