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New Social Security Rules Play Into Reverse Mortgage Retirement Strengths

Changes to the Social Security program enacted this year are lending credence to reverse mortgages as a viable retirement income planning strategy, according to some retirement experts during a recent webinar.

Presenting during a webinar hosted last week by Retirement Experts Network, Kurt Czarnowski, who previously served as communications director for the Social Security Administration (SSA) for 33 years, discussed the basic fundamentals of Social Security and covered recent policy changes to the program over the past year.

Though several changes befell Social Security with the passage of the Bipartisan Budget Act of 2015 last November, one of the most significant and widely publicized policy updates concerned the “File and Suspend” claiming strategy.

Under the “old” law, the File and Suspend strategy allowed one spouse, who has reached their Full Retirement Age, to apply for Social Security benefits and immediately request that payments be suspended.

By suspending payments, this spouse wouldn’t collect any benefits, but would make his/her spouse eligible to begin collecting up to 50% of the worker’s Full Retirement Age amount. The worker suspending payments would then earn delayed retirement credits since he/she wasn’t collecting any benefits. The previous rules also allowed for beneficiaries, until age 70, to request lump sum repayment from Social Security of any benefits that had been withheld.

But that has since changed with the passing of the Budget Bill last year, which allowed for a grandfathering period through April 29, 2016. For people who were at their Full Retirement Age—the age when they can receive 100% of their Social Security benefits—and chose to File and Suspend before April 29, they would be eligible under the old policies.

Under the new law, if a person chose to File and Suspend benefits after April 29, Social Security would still suspend that person’s benefits, however, the agency would also be required to suspend benefit payments to anyone else who might be collecting on that person’s account, Czarnowski said. Another big change: someone who asks to have payments suspended after April 29 are no longer able to receive a lump sum repayment of benefits that have been withheld.

“In my view, there’s no real benefit to filing and suspending, and I think that was the intention of Congress,” Czarnowski said.

Social Security is a mainstay resource for retirement planning. Among American workers of all ages, 70% expect to rely on this government benefit as a source of retirement income, according to the latest findings from the 17th Annual Transamerica Retirement Survey released last month. But while the majority of retired Americans will utilize Social Security as a critical funding source, the reality is that a person’s retirement cannot rely upon these benefits by themselves.

“Social Security was never intended to be anybody’s sole source of income in retirement,” Czarnowski said. “But despite changes in the budget bill, I continue to think that good things come to those who wait.”

The same goes for homeowners age 62 and older who haven’t yet reached their Full Retirement Age for Social Security, but have a more immediate need for cash flow in retirement.

In these situations, reverse mortgages have been commonly used as a means to delay drawing from Social Security until the homeowner can begin receiving their maximum benefits, according to Tom Dickson, national leader of the financial advisor channel at Reverse Mortgage Funding, which co-sponsored the Retirement Experts Network webinar.

Similar to the Social Security program, reverse mortgages have also undergone several significant changes of their own in the past year. For RMF, a big change in the Home Equity Conversion Mortgage (HECM) product has been a reduction in initial cost.

In the past week, the company has co-sponsored several webinars hosted by the Retirement Experts Network, in efforts to educate more financial services professionals on how a HECM can fit into their clients’ retirement plans.

While part of the effort is to promote the company’s $125 one-time setup fee, most of the presentation served as a brief primer on recent developments in the HECM program, while also demonstrating various scenarios in which a HECM line of credit can help retirees reduce their withdrawal rates from Social Security and other investments by providing a tax-free funding source to supplement retirement.

“The earlier you put this [credit line] in place, the larger the growth will be for your client,” Dickson said. “You can, in effect, create a deferred tax-free cash strategy here and still have a very large credit line available to them.”