Q&A: The end of “claim now, claim more later”

Dear Readers: Congress just killed the Social Security strategy known as “claim now, claim more later” that allowed married couples to boost their benefits by tens of thousands of dollars.
The changes, which were part of the budget deal signed into law last week, also eliminated the option of getting a lump-sum payout if you suspended an application for benefits and later changed your mind. Today’s column will focus on those changes.

Dear Liz: My husband is 68 and drawing Social Security. I will be 62 in the spring and plan to retire. May I file for spousal benefits at 62 and delay filing for my benefits until my full retirement age of 66?

Answer: No.

Even before Congress changed the rules, you would have had to wait until age 66 to file for a spousal benefit first if you wanted to switch to your own benefit later (typically when it maxes out at age 70).

When you apply for benefits before full retirement age, you are deemed to be applying for both spousal and your own benefits and essentially given the larger of the two. Only when you reached full retirement age did you have the option of filing a “restricted application” for spousal benefits only.

If you were just a few months older, you would still have that option.

Congress has eliminated restricted applications for people born after 1953.

People who are 62 and older before the end of this year will still be able to file a restricted application at 66 and get spousal benefits, but only if their partners are either receiving benefits or were able to “file and suspend” — to file an application and suspend it before May 1, 2016.

That’s when the law’s grace period ends, eliminating people’s ability to file-and-suspend in order to trigger benefits for a spouse or child.

The potential payouts from using these two techniques, which together were called the “claim now, claim more later” strategy, were so great that advisors typically recommended that people tap their retirement accounts early if that was the only way they could delay their Social Security applications long enough to benefit.

Now that these strategies are off the table, people will need to take another look at their retirement strategies to see what makes sense.

In general, couples should try to maximize the larger of the two benefits they get, since that will be the amount the survivor has to live on.

Dear Liz: I am 65 years old and my wife is 63. We have enough savings so neither of us needs to start taking Social Security.

My plan is to file and suspend when my part-time job ends, which could happen starting a year from now. I believe my wife can file for spousal benefits then. Assuming we don’t need the money but at the same time wish to maximize our benefits, what’s the best way to proceed?

Answer: You may be one of the few couples who can still take advantage of the “claim now, claim more later” strategy, or at least the restricted application part.

If you’ll turn 66 before May 1, you can file and then suspend your application. That will preserve your wife’s ability to claim a spousal benefit when she turns 66 while allowing your own benefit to grow until it maxes out at age 70. Then she can switch to her own benefit at 70, if it’s larger than her spousal benefit.

If you’ll turn 66 after May 1, consider putting off your application until your wife turns 66. Once you start receiving benefits, she’ll be able to file a restricted application for spousal benefits only and then switch to her own benefit at 70.

Another possibility is that you could be the spouse to file a restricted application, but your wife would need to start her benefits early, which could stunt the amount you get overall.

Consider using Social Security claiming strategy software to evaluate your options, but make sure it’s been updated to reflect the recent changes.

At this point, most calculators seem to be using the old rules, although MaximizeMySocialSecurity.com, one of the leading options, promises to be updated by Nov. 16.

Dear Liz: I’m single and was never married long enough to qualify for spousal benefits. This change doesn’t affect me, right?

Answer: Wrong. File-and-suspend also could function as a kind of insurance policy for people, whether they were married or single.

Those who wanted to maximize their benefits could file and suspend their applications at full retirement age. If they later changed their minds, they could get a lump-sum payout back to the date of those applications.

But not for long. That option won’t be available to people who haven’t filed and suspended before May 1.

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The budget deal is a lesson in loopholes for retirees

tax loopholeEven people decades away from retirement should pay close attention to how Congress just ended two lucrative ways of taking Social Security benefits, known jointly as the “claim now, claim more later” strategy.

One big lesson: Once claiming methods are seen as benefiting the affluent, they are labeled loopholes, and that puts them on the chopping block.

“They can go away, and they can go away fast,” says Michael Kitces, a partner and director of research for Pinnacle Advisor Group in Columbia, Maryland.

In my latest for Reuters, how claiming methods turn into loopholes, leaving them vulnerable to cuts.

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Q&A: Automatic payments

Dear Liz: Since I lost my second job, we have fallen behind on our bills. Although we get paid on Friday, by Monday our checking account is in the red even without buying anything.

It’s all going to automatic payments for things like insurance and college savings for our child. I think the bank has a way of processing transactions to maximize our bounce fees. Should we take control and pay manually? Is automatic payment a recipe for disaster?

Answer: In your situation, yes, because you’re spending more than you make. The bank’s fee-maximizing policies aren’t helping matters, but the fundamental problem is that you’re living beyond your means.

Your first step should be to use a refund calculator to see whether you can lower your tax withholding and take home more in your paychecks. Turbotax has one on its site called TaxCaster that’s easy to use. If you’re on track to get a fat refund next year, adjust your withholding so you can get the money now, when you need it. The human resources departments at your jobs can help with this.

Once you have a clear idea of your current income, review your spending to see where you can cut. Those college contributions should be among the first to go. Yes, you want to educate your child, but other expenses — including current bills and retirement savings — must take priority until your income is higher. Slashing expenses may be painful, but it’s necessary to avoid going into debt or incurring unnecessary bank fees.

You can call the bank and ask it to turn off bounce protection on your debit card transactions, but you may not be able to do so for automatic payments or checks. If that’s the case, you may want to discontinue automatic payments until you get a better handle on your finances.

Another option, if you want to continue with automatic payments, is to sign up for true overdraft protection. This is less expensive than bounce protection and taps your savings or a line of credit if an automated expense exceeds your balance.

Automatic payments are a great way to make sure your bills are paid and that you don’t incur late fees. Automatic payments also can protect your credit, since skipped payments on credit cards and loans can devastate your scores.

But you have to be able to keep a pad of cash in your checking account or have low-cost overdraft protection. If you can’t, automatic payments can cause more problems than they solve.

Q&A: 401(k) and job changes

Dear Liz: I had to resign from my job as a phlebotomist at a hospital. Did I lose the money that was in my 401(k) or do I still have it? How do I find out?

Answer: Any money you contributed to a 401(k) is yours.

Money contributed by your employer may be subjected to vesting rules that could limit how much you can keep. Company matches may vest over time, giving you access to a portion of what’s contributed each year, or they may vest after a certain number of years, giving you access to all the money.

Say your match vests at 20% each year starting with the second year. You would get nothing if you quit after the first year. After the second year, you would get 20% of the match balance (the company’s contribution thus far plus or minus any gains). After the third year, you would get 40% of the match balance, and so on until you are entitled to 100% of the match balance after the sixth year.

You should contact your company’s human resources department to find out what your options are for your account. You may be able to leave it where it is to grow, which may be your best option until you find another job.

At that point, your next employer may allow you to roll the account into its retirement plan. If you can’t keep the money where it is, open an IRA and have the 401(k) provider send the check directly there.

What you don’t want to do is withdraw the money, since you’ll lose a big chunk to taxes and penalties. Even having the check sent to you to deposit into the IRA is a bad idea, since 20% will be withheld, and you’ll have to come up with that cash from another source to avoid taxes and penalties.

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