Forbes - May 4, 2020
The COVID-19 pandemic has brought uncertainty to virtually every aspect of our financial lives – especially to those who were either looking to retire this year or are being forced to consider an early retirement. If you are 62 or older and have experienced a job loss as a result of the pandemic, Social Security might seem like a valid safety net to help replace that lost cash flow, but don’t jump to that conclusion yet. Here are some things to consider depending on the situation that you are in.
The Case for Delaying
You can file as early as 62, however age matters a great deal when it comes to the size of the benefit you get. Every year you delay until age 70 will increase your payments. You can see the impact of an early claim versus a delayed claim based on your age and average income using a chart like this one from the Consumer Financial Protection Bureau, which uses an average life span of 85.
The rule of thumb is that if you are generally healthy and likely to live beyond the average longevity in America, delaying until 70 is the optimal strategy. (You can use a calculator livingto100 to help assess that for yourself.) Life expectancy is a large part of this, but in a situation like we are in today, you might encounter an immediate need to replace an unexpected loss of income. To be prudent, be sure to consider your savings, other pension income, and your intentions to go back to work once things get back to “normal”.
Loss of income and have other savings?
In times like these, having ample emergency savings is critical. The financial planning guidelines recommend 3-6 months of expenses. If you have that covered and have substantial savings over and above that, consider living off some of those savings to delay Social Security.
Here’s when a delay might make sense . If you have lost income due to the pandemic, you may find yourself in a lower tax bracket this year, which might create an opportunity to take money out of pre-tax savings accounts and pay less in taxes while delaying Social Security. As a result, you can typically guarantee higher lifetime payments. For example, a 62 year old that would be eligible for ~$1500/month at their full retirement age could increase their lifetime income by over $100,000 by waiting until their Full Retirement Age (FRA) versus taking it at age 62. Delayed retirement credits amount to an 8% increase in benefits for every year you delay until age 70!
Here’s where an early claim might make sense. If you are in a position where you might have other family members relying on that income and/or would possibly have to take money out of a portfolio that is experiencing consistent negative returns due to persistent bear market conditions, claiming early might help alleviate some of that stress.
Loss of income and have no savings?
One strategy is to claim benefits now and suspend them later. The way it works is that you would claim Social Security before your Full Retirement Age (FRA) and once your reach FRA, you would be able to suspend your benefits and earn delayed retirement credits up to age 70. For example, if you were in a position where you were not ready to retire but suffered a loss of income, you could claim Social Security early and then suspend your benefits later at full retirement age. The idea is that you would claim to help make up that income gap and then be prepared to wait until FRA to suspend your benefit in order to start earning those delayed income credits, which amount to an 8% increase in benefits per year. This could allow you to solve for the present cash flow problem and give you an option to secure more guaranteed income in the future – especially if your plans were to continue working past your FRA.
One thing to note is that if you gain employment while claiming social security, you will be subject to the retirement earnings test. This means that Social Security will withhold $1 in benefits for every $2 of earnings in excess of the exempt amount if you are claiming before your FRA. For the year you reach your FRA, then $1 for every $3 in excess of the exempt amount are withheld, but the reduced benefits are not lost permanently. When you reach your full retirement age, your monthly benefit will be increased permanently to account for the months when benefits were withheld.
Another strategy can be applied to married couples where one spouse could choose to file early, and the other delays. This strategy can help solve for the cash flow problem today while helping maximize the retirement benefits of one spouse for the future. Ideally, the spouse that delays is the one that would be eligible for the highest monthly benefit. Again, every month/year that you delay leads to increased monthly benefits for both spouses, so it is important to run the numbers to help determine which is the optimal strategy given your personal situation and need.
Lastly, if you are age 62 or older and need to claim early due to a sudden job loss, you might consider what I call the Social Security mulligan and file for social security early but then within 12 months, request a withdrawal of your benefit. This could work if your role is temporarily eliminated or furloughed like many of the jobs impacted by COVID-19. You have 12 months from first receiving your benefits to file Social Security Form SSA-521 (“Request for Withdrawal of Application”). If you are approved, you will be required to repay all the benefits you have received. This will essentially reset your social security benefit as if you never filed a claim in the first place, meaning your future monthly benefit can continue to grow.
How do I figure this out for myself?
If you have an account on the Social Security website, you can access your personal statement of benefits, which includes your estimated benefit amount at various ages in addition to your wage history. Review this information and make sure it looks accurate as any errors will impact your benefit amount. If you haven’t established an account yet, consider doing that as soon as you can as the paper statements are seldomly mailed out anymore.
You can use a calculator like this one to help run the numbers based on the strategy or approach you plan to take. Remember to think about the trade offs with each option and the needs and assumptions for your situation. You’ll also want to take time to evaluate your budget and consider creating a lean budget that you can implement to help get you through a cash flow crunch and provide you with more options.
Keep in mind that these are extraordinary times and the general guidance for the masses might not be the best option for you. Take the time to think through your situation, and if you need help, be sure to reach out to a trusted financial professional, including if you have access to a personal financial coach through your financial wellness benefit at work. Be safe and stay well!
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