Image source: Social Security Administration.
There's little argument among the American public that the Social Security program is in trouble, at least over the long-term. In a 2011 poll conducted by CNN/ORC International, more than 70% of respondents believed Social Security was either "in crisis" or had "major problems."
The reason so many Americans are concerned about the well-being of one of America's most important entitlement programs relates to reports from the Social Security Trustees that the Old-Age, Survivors and Disability Trust will exhaust its cash reserve within the next two decades, precipitating a substantial cut in benefits if nothing is done. This, combined with a lack of Social Security education -- quite a few consumers are of the opinion that the program could go bankrupt, which isn't true -- has fed a pessimistic view of the program.
The latest Trustees report for 2015 suggests a slightly less frightening cut in benefits is imminent by 2034 (21% as opposed to 23% in prior-year reports) if nothing is done to raise additional payroll tax revenue, cut costs, or do some combination of the two. Nonetheless, no Americans, retired or not, want to see their Social Security benefits cut by 21%.
In response, some Social Security beneficiaries have used every trick in the book available to ensure they maximize their lifetime benefits. Unfortunately, some of those loopholes will be going away in a matter of months thanks to the budget passed just days prior by Congress.
Image source: Social Security Administration.
Kiss these two Social Security loopholes goodbye
Couples who have been or had planned on using the file-and-suspend strategy or the restricted application strategy (which is probably best known as Filing as a Spouse First (FAASF)), are about to kiss these potentially lucrative Social Security loopholes goodbye for good.
The file-and-suspend strategy is a popular method used by couples that have markedly different lifetime incomes. Under file-and-suspend, the higher-earning individual (upon reaching full retirement age) will file for Social Security benefits but then immediately suspend them. Suspending these benefits allows them to continue to grow over time at a rate of around 8% per year until age 70. Meanwhile, the lower-earning spouse claims spousal benefits upon reaching full retirement age. When the higher-earning spouse hits age 70, he would then file for benefits once more and the lower-earning spouse would then take his larger monthly benefit.
Image source: Social Security Administration.
With FAASF, the lower-earning spouse files for their regular Social Security benefits, allowing the higher-earning spouse to claim spousal benefits. Relying on these spousal benefits allows the higher-earning spouses payment to continue to grow at roughly 8% per year. The catch, as Foolish retirement planning guru Dan Caplinger points out, is that the higher-earning spouse needs to wait until at least their full retirement age before claiming spousal benefits, otherwise the program will deem you to have taken regular benefits and spousal benefits at the same time.
Based on estimates quoted in a CNBC report, the use of file-and-suspend and/or FAASF could have netted upper-income couples up to $67,000 in additional lifetime benefits.
If there is some solace to the elimination of file-and-suspend and FAASF, it's that planning when to file for benefits as a couple just got a whole lot easier. There were, in theory, more than 3,000 possible strategies that could have been employed under file-and-suspend and FAASF. This isn't to say the help of a financial advisor may not still be needed when deciding when to claim as a couple moving forward, but it's no longer going to be as difficult as finding a needle in a haystack when determining the best course of action as a couple.
Make these choices to better your retirement
Some of you may shed a tear seeing these potentially lucrative loopholes going away, but the latest budget by Congress provides an even greater reminder that relying on the government to prop you up in retirement isn't a very good strategy. If anything, you should make some key choices to help minimize your reliance on Social Security -- which is really designed to replace about 40% of a worker's income -- come retirement.
Image source: Social Security Administration.
The best thing you can do to better your situation is to begin saving as early as possible for retirement. There is no amount too small to begin saving since time and compounding can turn a small investment into a sizable nest egg over the long run. Along those same lines, it's never a bad idea to consider creating a budget that'll allow you to better understand your income and cash outflow. With a clear picture of where your money is going you'll be able to optimally apportion funds to your retirement accounts.
An idea that's becoming more of a reality for baby boomers, and which could be a reality for millennials who find themselves deep in student loan debt, is to work longer. Understandably, this isn't something everyone will be able to do since our health may not hold up into our golden years, but if you can work well into your 60s or to age 70, you'll be able to retire with a much higher Social Security benefit than if you were forced to claim closer to age 62.
Finally, take taxes into consideration now and later in life. Where you retire can make a big difference when it comes to hanging on to your income. Keep in mind that slightly more than a dozen states tax Social Security benefits to some extent, and that other taxes (e.g., property and sales tax) can vary from state to state. Retiring in a tax-friendly state could help stretch your dollars in retirement.
Properly planning for retirement could also allow you to keep more of your income during retirement. A Roth IRA is a tax-advantaged retirement tool that allows an individual's money to grow completely tax-free. Best of all, because there are no minimum distribution requirements as with its counterpart, the traditional IRA, an individual can continue to invest without making a withdrawal well past age 70. With life expectancies on the rise, not having to pay a cent on investment gains in your retirement account could lead to a lot of extra money during your retirement.
