4 Social Security Terms You Need To Know

As of November 2nd 2015, President Obama signed, and thereby enacted into law, the Bipartisan Budget Act of 2015.  Subtitle C, Section 831 of this bill includes significant changes to social security benefits.  These changes include the phase out of filing strategies referred to as “unintended loopholes” created previously by Congress back in 2000.  The resulting changes in this new law are:

  • The ability to receive a Retroactive Lump Sum (of your suspended benefits before age 70); and
  • The ability to file a Restricted Application (file for your spousal benefit only, while letting your lifetime benefit grow)

Note: In order to apply either strategy (Retroactive Lump Sum or file a Restricted Application) you must “file and suspend” your lifetime benefit. 

There are going to be a lot of questions regarding these changes and how they will affect you. Before you panic, it is important to understand that if you and your spouse have already implemented a “file and suspend” strategy, your benefits will not change as a result of this new law.  If you aren’t sure what these new laws mean and how they might impact you, it is important to first have a clear understanding of the following four key terms:

1.  Full Retirement Age:  As defined by the Social Security Administration, full retirement age is the age at which a person may first become entitled to full or unreduced retirement benefits.

  For those individuals born between the years of 1943 and 1954, full retirement age is 66, although this does not mean that you cannot start receiving benefits earlier. However, for those who wish to retire between the age of 62 and full retirement age and start receiving benefits early, it is important to note that those benefits will be reduced a fraction of a percent for each month before full retirement age.

   

2.  File And Suspend:  If you and your current spouse are at full retirement age, one of you can apply for retirement benefits now and have the payments suspended, while the other applies only for the spouse's benefits. This strategy allows both of you to delay receiving retirement benefits on your own records in order to get delayed retirement credits.  File and suspend is often used by couples with a big earnings discrepancy.  The higher-earning spouse can file his or her benefit at full retirement age and suspend it, letting the benefit grow all the way up to age 70. The other spouse can then claim a spousal benefit (half of the filer's benefit) at that time. Upon reaching full retirement age, the spouse can file for his or her own worker benefit if it's bigger than the spousal benefit.  This is a well-known way for maximizing social security benefits.

3.  Retroactive Lump Sum:  If you delay applying for benefits until after full retirement age (66 for those applying now), you can earn delayed retirement credits of 8% a year. When you do apply for benefits, you can accept a monthly benefit that includes all the delayed credits, or you can accept a lump sum that is worth six months of retroactive benefits.

  Note: Your monthly benefit will be reduced to the amount you would have received if you had applied six months earlier.

4.  Restricted Application:  Restricted application takes place when someone who is full retirement age (that's 66 or 67 depending on when you were born) applies for spousal benefits only and delays his or her own benefits allowing them to grow 8 percent a year 

Again, if you and your spouse have already implemented a “file and suspend” strategy, your benefits will not change as a result of this new law.  However, if you haven’t implemented this strategy and you are 66, you only have until May 2, 2016 to do so.  After that date, voluntarily filing and suspending will be prohibited for the purposes of triggering a spousal benefit for a spouse or to protect the right to file for retroactive benefits.

 

Are you concerned about how the new social security laws will affect you and your retirement planning?  If so, consider speaking to a qualified financial planner who can discuss how the changes coming down the pipeline will impact you. 

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