Author: Jamie Hopkins Source: Forbes
Retirement planning can be extremely challenging as individuals are tasked with planning for an uncertain time period. If that were not difficult enough, in many ways retirement planning is like trying to shoot a moving target in the wind. Each and every year new legislation, court cases, and market conditions impact retirement planning, and 2015 certainly was no different. In fact, public policy changes to Social Security really unnerved a lot of people who had become accustomed to the stability of certain Social Security benefits we have enjoyed for the last decade. In addition, the retirement planning market saw an influx of new financial products, the sun setting on certain financial products, a changing investment market, and a variety of legal changes. However, there were five changes that occurred in 2015 that everyone planning for retirement needs to know about: 1) Reduced Social Security claiming strategies; 2) enhanced reverse mortgage consumer protection rules; 3) considerable annuity product developments; 4) expansion of the myRA savings program; and 5) the creation of ABLE accounts. While all of these topics can be fairly complex, this article will provide a brief overview of each of these changes for your consideration as you begin to plan for 2016.
Reduced Social Security Claiming Strategies:
The biggest change to retirement income planning for 2016 is the elimination of a number of Social Security claiming strategies. On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015, which made the most significant changes to Social Security that have been seen in the past decade. The goal of these changes was to remove certain claiming strategies and to improve the overall funding status of Social Security. However, in the process, certain Americans, some nearing retirement, lost a great deal of potential future Social Security income.
Two major changes occurred – 1) extension of the deemed filing rule from full retirement age to age 70, and 2) removal of most “file and suspend” strategies. The extension of the deemed filing rule applies to everyone who is not age 62 by the end of 2015. Before the rule change, if you were eligible for a worker’s benefit and a spousal benefit at the same time and you claimed benefits prior to full retirement age, the deemed filing rule applied and you would simply receive the larger of the two benefits. However, if you waited until full retirement age to claim, you could choose the spousal benefit at full retirement age and defer your worker’s benefit, allowing it to continue to grow until you reached the age of 70. In this way, you could receive some income now and still take advantage of receiving the deferred worker’s benefit at age 70. This has been changed; now, anyone filing for benefits will receive the larger of either the worker’s benefit or the spousal benefit as you are deemed to have filed for the larger of the two benefits at any time you file.
In conjunction with the extension of the deemed filing rule, the new laws removed the ability to voluntarily file-and-suspend your Social Security benefits for the purposes of either: 1) triggering a spousal benefit for a spouse; or 2) protecting the right to file for retroactive benefits. “The most common use of the file-and-suspend strategy has been when there are two working spouses,” says Brian Albers, CFP® and practice manager for Raymond James. “The higher income earner would file-and-suspend, and the spouse could then collect benefits based on the higher earnings record while the higher earner continued to earn delayed retirement credits on their individual benefit.” If you would still like to file-and-suspend benefits, there is a small grace period of 180 days, which provides an opportunity for those already at least age 66 or those who will reach the age of 66 before May 1, 2016 to voluntarily “file-and-suspend” in order to be grandfathered in under the old rules. Filing-and-suspending benefits is not always the best course of action, so make sure you understand how claiming Social Security benefits fits into your overall retirement income plan.
Enhanced Reverse Mortgage Consumer Protection Rules:
Properly using one’s home equity in retirement is a tremendous challenge. The strategic use of a reverse mortgage can in some cases help retirees improve their retirement security. However, reverse mortgages do come with some risks and have been used poorly by many people in the past, with almost 10% of reverse mortgages going into technical default due to unpaid taxes and insurance premiums. Technical default can result in the in the loss of the home. In an effort to stem this problem, the Home Equity Conversion Mortgage (HECM) program, which represents roughly 95% of all reverse mortgages, was vastly overhauled to establish income and credit criteria to ensure a more sustainable borrower. The HECM Reverse Mortgage continues to prove to be a powerful resource for comprehensive retirement income planning,” says Don Graves, RICP® and president of the HECM Advisors Group. Don notes that “the changes of the last 12 months certainly reflect this trajectory: income and credit criteria testing to improve lending practices and protect consumers, limitations on upfront draws to help protect future equity, spousal protections to accommodate younger spouses, and reduced fees and robust pricing models that favor the early establishment of a standby HECM line of credit.” All of these changes, combined with increased awareness about the proper use of reverse mortgages, have set the stage for better and more comprehensive retirement income plans that have the capacity to strategically utilize home equity as an income source.
Considerable Annuity Product Developments:
In 2014, the U.S. government adopted new rules allowing for the use of deferred annuities inside of one’s 401(k) s and IRAs. These qualified longevity annuity contracts (QLACs) can help retirees avoid required minimum distributions at age 70 ½, increase their retirement income, and provide a hedge against longevity risk. In 2015, a number of insurance companies developed QLACs for IRAs and a few developed products for 401(k)s. However, annuity product development did not stop there.
Companies continue to add new products and features to help meet the public demand for more secure sources of retirement income. For example, New York Life rolled out both a QLAC and an income annuity called the Mutual Income, which allows for policy owners to receive annual dividends that can increase their retirement income, providing a level of inflation protection. “As the income annuity market leader for nine consecutive years, we have unique insights into consumers’ retirement income needs. Our recent product innovations have centered around these insights by providing consumers with additional income options and greater flexibility and liquidity. Whether it’s our recent fixed deferred annuity that comes with an optional lifetime withdrawal rider, or our new suite of dividend-eligible income annuities, we are offering consumers more choice. Even the Qualifying Longevity Annuity Contract (QLAC), now provides an increased level of flexibility for qualified assets that consumers, in the past, could only fund with their non-qualified assets. The expansion of retirement income options is great news for today’s retirees, and pre-retirees,” said Dylan Haung, managing director, New York Life. Moving into 2016, if you are considering buying an annuity, make sure you talk to your advisor first and do some homework on the available product offerings. Not all annuities are the same, and not all annuities will be suitable for your specific situation.
Expansion of the myRA Savings Program:
In 2015, the myRA savings program, which utilizes a Roth IRA with a specialized government security as the investment option, was rolled out nationwide. At first, the program was only available to a select number of companies, but now it is available to everyone who meets the Roth IRA income limits for each year. For 2015, the Roth IRA phase-out range to make contributions based on your adjusted gross income (AGI) is between $183,000 to $193,000 for married couples filing jointly, and $116,000 to $131,000 for singles. The new myRA expansion allows you to save money on an after-tax basis by making contributions through payroll deductions, one time checking or savings payments, or even from your tax refund check. Remember, you can contribute to the myRA for 2015 all the way up until April 15, 2016. For a young person who does not yet have much investment experience and does have low taxable income for 2015, you might want to consider putting your tax return check into the myRA. Make sure you understand the features and benefits of the myRA to see if it fits your situation before making any contributions. For more information on the myRA click here.