The New Social Security

The New Social Security

We’re living through the end of an era. In 2016, Congress, with bipartisan and presidential support, suddenly, and without warning, eliminated several long-standing Social Security strategies including file-and-suspend and restricted applications. For those of you who were born before January 2, 1954, there’s still time to take advantage of the restricted application option, albeit not much. For everyone else, Social Security looks very different than it did a few years ago.

When it comes to Social Security, one must consider multiple factors to determine the best collection strategy. No one situation is the same, and there is no one-size-fits-all answer. For example, conventional wisdom would say that you should always wait until age 70 to begin collecting in order to take full advantage of the 8 percent annual growth to your benefit from full retirement age to that point, but is this always the best strategy?

Take this hypothetical example of Jane Doe. Jane is single and has just turned 66 and 4 months (full retirement age). She has not retired yet, but would like to move to part time and retire completely at age 70. She had never been a big saver, but she had a good pension program and had socked some money away into a 401(k) over the years. She had never prioritized saving after-tax money, though, and therefore has essentially no after-tax savings. As a result, any capital pulled from her investment portfolio in retirement will be fully taxable; this will likely result in a substantial portion of her Social Security being subject to tax as well. Her part-time income should be sufficient to cover her living expenses until she fully retires, at which point she will rely on a combination of her pension, investments and Social Security for income.

For Jane, it could be in her best interest to file for Social Security now instead of waiting until age 70. Since her part-time income is sufficient to cover her living expenses, this would allow her to save her Social Security income into an after-tax investment account, which could provide around $80,000 to $100,000 in after-tax investment capital once she retires at age 70. This, in turn, provides more tax planning flexibility down the road which can help limit the amount of Jane’s Social Security and Medicare benefits that are subject to tax in the future.

As you can see from Jane’s situation, there are many different factors that need to be considered when determining a Social Security strategy—delaying Social Security until age 70 is not always the best option. Social Security has a language all of its own, and the rules frequently change. As such, understanding the system and knowing what options are available is critical for developing an effective strategy. With the file-and-suspend and restricted application loop holes closing, it would seem like Social Security is simpler than it has ever been. But, with fewer filing options available, proper Social Security planning has never been more important.