Changes in Social Security policy can cause alarm to those currently on or soon to be claiming benefits. However, one piece of legislation, The Social Security Fairness Act (SSFA), signed by President Joe Biden in the last couple of weeks of his presidency, is designed to help certain groups of Social Security recipients.
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Financial experts explained what the SSFA means for retirees, and some budgeting tips when these changes go into effect.
What the Act Does
The SSFA repeals the Windfall Elimination Provision (WEP) from 1989 and the Government Pension Offset (GPO) from 1977, according to Don Grant, a CFP and CFP Board ambassador at CFP Board.
“Those two programs affect approximately 2.8 million government workers who were considered to have been double-dipping if they were to collect Social Security benefits while receiving pensions from non-Social Security-covered public sector jobs or a government pension,” he explained.
By eliminating the WEP and GPO programs, nearly 3 million public workers, including teachers, firefighters, police officers and federal employees, will now be allowed to take their Social Security benefits in addition to their pensions, Grant explained.
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There May Be a Hang Up
While the SSFA reinstated eligible recipients’ Social Security benefits, retroactive through 2024, Grant pointed out that recalculating benefits for 3 million current retirees takes time and resources.
“That effort is ongoing and may be in jeopardy due to the current administration’s efforts to slash budgets and manpower in the agencies that perform those recalculations,” he said.
He urged patience to government and/or public sector workers affected by WEP or GPO, who haven’t received benefits yet.
“There is no assurance that you’ll receive the benefits as directed by the SSFA’s repeal of those programs, but you can hold out hope.”
Be Wary of Lifestyle Creep
If you do end up receiving the extra benefits, be careful of how you spend it, according to George McFarlane, president of 7 Waters Advisors.
“First and foremost, it’s important these retirees don’t let this income boost lead to a change in their lifestyle,” McFarlane warned. “Increased income could lead to increased spending.”
Check Your Tax Bracket
Retirees may also want to visit with a tax advisor in case the income pushes them into a higher tax bracket, McFarlane said. “This could happen, especially if the retiree is pulling money from pensions, IRAs or other investments. Looking into strategies to reduce taxable income may be necessary,” he said.
Build a Larger Buffer
Retirees should also consider using extra funds to build a larger safety savings account, such as an emergency fund.
“This account should be earmarked for emergency expenses that may arise in retirement. This account should be enough to cover six- to 12-months’ worth of living expenses,” McFarlane said.
Purchase Long-Term Care Insurance
Another smart move with extra income is to purchase long-term care insurance or estate planning vehicles (life insurance or trusts), McFarlane advised.
“These products can help retirees maintain control during retirement, while ensure there is a legacy left behind for your family after you’re gone.”
Engage In Smart Budgeting Basics
Regardless of how you plan to spend additional income, Grant urged some smart budgeting basics. First, look at your total income, from all sources (pension, rental properties, investment royalties, annuities, etc.) and then calculate your spending across “needs” and “wants.”
“Net your earnings to your spending. Do you come up short? Or do you have a surplus of income? If it’s a surplus, you should be fine. If a deficit, there are several actions you can take. You have two choices: Spend less or make more.”
Shift Investment Allocation
One way to enhance your income would be to shift your investment allocation, Grant said. He recommended working with a CFP to build a “more income centric investment portfolio.” This means finding products that are designed for income, such as dividend-bearing stocks, hedged equity funds and options-based investments.
Meanwhile, those who are expecting but haven’t yet received these increased benefits, should stick with their existing budgets and act as though the additional money may never come. That way, you won’t overspend or make plans you can’t afford.
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This article originally appeared on GOBankingRates.com: 6 Budgeting Tips for Retirees After the Social Security Fairness Act
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