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3 Ways to Help Fill the Income Gap Left by Social Security Changes

Insights & Ideas Team •  November 23, 2015 | Enjoying Retirement, Your Finances

Married and divorced couples on the verge of retirement may be scrambling to answer “Now what?” after it was announced that two strategies to maximize Social Security benefits are being discontinued.

The Bipartisan Budget Act of 2015, signed in November, eliminates the ‘File and Suspend’ and ‘Claim Now, Claim More Later’ provisions. The strategies involved tactics such as having the higher-earning spouse file for Social Security at his or her full retirement age but delay taking benefits. This allowed the lower-earning spouse to claim the ‘spousal benefit’ while the higher-earning spouse’s benefit continued to grow.

“For some couples, the elimination of these strategies could mean a loss of up to $15,000 in benefits during each of those three or four years between their full retirement age and age 70,” said Angela DiCastri, director of the retirement market for Northwestern Mutual. “So the question becomes, how can that gap be filled? And that’s a particularly difficult question to answer for people who are nearing retirement and who don’t have much time to recover.”

What are the options? Some people are still able to take advantage of these strategies—if they act quickly. File and Suspend is still available for eligible individuals who file and suspend by April 30, 2016. Claim Now, Claim More Later is still available for those eligible individuals who are at least age 62 by the end of 2015.

However, if you find you are unable to use either of these strategies, you have other options. You could delay retirement and work an extra year or two to make up the difference. You could choose to take Social Security earlier than planned, even though you’d be locking in a reduced benefit for life. Or you could cut back on your expectations and simply spend less money in retirement. If you’re not willing to make those sacrifices, there are other ways you may be able to bridge the newly formed gap in your retirement income plan:

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1. Explore other options for maximizing Social Security. Although the File and Suspend and Claim Now, Claim More Later strategies are being eliminated, there are other ways to maximize your Social Security benefits. One of the most valuable strategies is also one of the simplest: Delay filing for benefits. For each year you delay taking Social Security between your full retirement age and 70, your benefit will increase by 8 percent. “That can add up to quite a bit of money,” said DiCastri. “But you can only delay taking Social Security if you have other retirement income you can rely on in the short term. So if that’s an issue, you may want to consider having one of you—either you or your spouse—take Social Security early to bring in some income while the other person delays.”

2. Leverage life insurance cash value. If you have a permanent life insurance policy that has accumulated cash value, you may want to consider tapping into the cash value to cover some of the gap in income. “If you make a withdrawal from the cash value, you’ll obviously be reducing the policy’s death benefit, but that may be a tradeoff you’re willing to make if it means having more money available to you while you’re living,” said DiCastri. “Plus, unlike many other sources of retirement income, withdrawals made from life insurance cash value are tax free up to the amount of premiums you’ve paid, which can be a great added benefit in retirement.”

3. Purchase an annuity. If you’re five or ten years from retirement, another option is to put aside money in a deferred annuity that you can convert to guaranteed income once you reach retirement. Or, if you’re on the cusp of retirement and don’t have time to save more, you can convert some of your existing retirement assets, such as an IRA, into an immediate annuity. “Either way, an annuity can be designed to deliver a steady stream of predictable income you can’t outlive,” said DiCastri. “So it’s a great way to supplement the guaranteed income provided by Social Security.”

The approach that’s right for you will depend on your unique circumstances and may require a combination of strategies to help you fill the gap left by the elimination of File and Suspend and Claim Now, Claim More Later. For that reason, DiCastri recommends talking with a financial professional to help you sort through your options. He or she can help you determine how much of a gap you need to fill and the best way to make up the difference based on your financial situation and goals for the future.

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