A change in Social Security and last fall’s market turmoil make January the perfect time to evaluate your retirement plan
While planning for retirement, most people look for every possible way to maximize their future fixed income. We’re all facing rising health care costs, overall inflation and longer lifespans, so naturally we want to ensure that we won’t outlive our money. This is why having a formal retirement income plan is so important.
In the past, some couples took advantage of a loophole in Social Security rules, which allowed them to reap an extra $60,000 (on average) from the system over a lifetime. Known as “file and suspend,” the strategy was the accidental result of the combination of certain regulations that allowed married recipients to maximize their benefits.
Under the file-and-suspend strategy, the higher-earning spouse of a married couple would file for his/her benefits at full retirement age. However, he/she would then ask for payments to be suspended until a later date, usually a few years away. During the time of suspension, the eventual benefits would grow by approximately seven percent per year, allowing for a more comfortable retirement income later.
Meanwhile, the lower-earning spouse would go ahead and claim his/her spousal benefits and start receiving checks at approximately 50 percent of the higher-earning spouse’s scheduled benefit amount. This allowed the couple to begin collecting some much-needed income from Social Security, while continuing to plan for retirement later. Eventually, if the higher-earning spouse died first, the lower-earning spouse could then switch to a survivor benefit at the now-higher rate.
Now here’s the bad news: If you decided years ago that file-and-suspend would become a part of your retirement income strategy, you will need to come up with a new plan. Congress recently axed the file-and-suspend strategy and the new law will go into effect six months after President Obama signs the bill.
For most couples, that means the option to file-and-suspend their benefits is off the table. However, if you and your spouse will both reach full retirement age within the next six months, you can still take advantage of the old rule.
In addition to checking into your Social Security strategy, January is a great time to examine your asset allocation, especially after the market’s downturn in the fall of 2015. A market drop is not uncommon after such a long bull run like we have had. In fact, there have been 35 declines of 10 percent or more in the S&P 500® since 1900. Of those 35 “corrections,” the index fully recovered its value after an average of approximately 10 months. There is no guarantee that the length of future recoveries will happen in the same time frame, but it’s important to keep in mind the purpose of the investments.
This is why January is the time to determine your investment allocation of cash, bonds, stocks, and other non-market risk investments. If you are contributing to a 401(k) plan at work or directly into an IRA or Roth IRA, continue to do so because there is no better time to buy than when the market declines. However, if your timeframe for needing to access your retirement accounts is less than five years or if income is your primary goal, then other non-market risk investments may be more suitable.
Both Social Security and investment strategies are important topics to discuss with a financial advisor before making any big decisions about your retirement plan. If you’re hoping to file and suspend your benefits in the next six months, or if you need to come up with a new plan because you will no longer be eligible to do so, a financial advisor can answer any questions you might have about Social Security and help you come up with a new plan to maximize your retirement income. Additionally, if you need help determining the right mix of cash, bonds, stocks, and annuities for your retirement funds, a meeting with a financial advisor would be helpful. Don’t go another year without a plan!
Stephen Stricklin is the founder of Lee’s Summit-based Wise Wealth, LLC, an independent, full-service, registered investment advisor firm. For more information, visit WiseWealthKC.com. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.