There are many facets of financial planning where the variables are relatively easy to determine. Retirement planning isn’t one of them. This task is one of the most challenging aspects of a client’s financial planning life as they’re planning for an uncertain period with many unknowns that can alter future decisions. Longevity, healthcare, long-term care, estate planning, asset distribution and charitable giving among many other variables can combine to create a difficult, overwhelming scenario that makes clients uncomfortable.
If that wasn’t the hardest part, every year there are rule changes that can have long-term and wide-ranging impact to retirement planning. Legislation gets passed, court cases set precedents, and overall market conditions can each alter retirement planning efforts. This past year has been no different with a multitude of changes to the Social Security program that has transformed the benefits people have become accustomed in the last ten years. Financial planning is seeing a time of rapid transition and it’s important to be aware of how this can affect retirement planning efforts for your clients. Here are some changes and trends that you and your clients need to be aware of in 2016:
1) Changes to Social Security
The Bipartisan Budget Act of 2015 was passed by Congress in October 2015. For Social Security claimants this means a few strategies that were previously used to maximize benefits can no longer be used. The changes are not going to remove any existing benefits for people currently drawing from their benefits, nor will it alter core benefits or payment brackets. Instead, it will change the file and suspend strategy, which previously allowed couples to maximize benefits by allowing one spouse to file for benefits once they hit full retirement age and then immediately suspending benefits, allowing the other person to claim spousal benefits while the suspended spouse sees an 8% growth in deferred benefits until age 70.
If clients are at least 66 or will turn 66 before April 30th, 2016, they can still take advantage of the file and suspend strategy and they will be grandfathered in under the old rules. Anyone who turns 66 later in the year will miss out on this advantage.
Another major change to Social Security is the elimination of restricted applications, which previously allowed clients in between full retirement age and 70 to file an application to claim spousal benefits and to defer their own. Once they turned 70 they could change their mind and begin receiving their own, now larger, benefits. The new rules consider a spouse who filed for benefits at any point after age 62 as “deemed filing,” which already applied to folks who filed before they were at full retirement age. Now, with restricted applications being eliminated, clients can either receive the larger of their spousal benefit or their own benefits. Once the decision has been made, however, it is permanent. This effectively eliminates deferred payment strategies. One thing to note, however, is that clients turning 62 before the end of this year will be grandfathered into the old rules.
2) Tougher Reverse Mortgage Rules
As of April 27th, 2015, significant changes to the Reverse Mortgage regulations been implemented. Borrowers looking to receive a reverse mortgage will have to pass a financial assessment and review before they can take out a loan against their property. These changes are meant to prevent loan defaults, but will add a layer of complexity and difficulty in obtaining a reverse mortgage. This new financial assessment rule falls under the Home Equity Conversion Mortgage program and will require borrowers to demonstrate their ability to pay property taxes as well as insurance premiums on the property during the reverse mortgage period. Lenders will have to look at borrowers’ income and credit history for the first time when engaging in these loan products, helping to ensure borrowers can meet all of their financial obligations.
Those who don’t meet these financial requirements are still able to qualify, they will just have to take the option of setting money aside from the loan proceeds to pay their property taxes and insurance premiums. These amounts can be quite large in some cases, making these reverse mortgages impractical for some borrowers.
3) Significant Individual Annuity Product Development
2015 ushered in a flurry of activity for individual annuity products. The variable annuity (VA) side saw some carriers either roll-out or update their investment-only VAs, which are being offered as alternatives to income-oriented VAs. However, there are still VAs with guaranteed income features available on the market. There are even a few carriers that rolled out new income guarantee features this past year, a clear acknowledgment of significant demand for products which allow buyers to take advantage of both the VA upside potential as well as the income guarantee.
Additionally, fixed annuities ushered in a series of managed volatility indices that have been added to contracts. Numerous FIA carriers either added or updated guaranteed lifetime withdrawal benefits as well.
Between these two products, the intention was to make fixed products more attractive to those clients who desire more certainty with less risk in their annuity account values as well as their payouts.
Retirement planning is a multi-faceted, difficult process to work through for many clients. With so many variables and such indeterminable time horizons, it is an area that requires more diligence than almost all other forms of long-term financial planning. However, paying attention to rule changes and being aware of how those can impact clients is an excellent first step in navigating this arduous portion of financial planning for your clients.