“The most important investment you can make is in yourself.” - Warren Buffett
When to begin taking your Social Security benefits is a question that I deal with on a regular basis. Despite what you hear, Social Security benefits are a major component of anyone's financial plan. Did you know that your Social Security benefits could total close to $1 million over your lifetime? But if you claim your benefits too early, that lifetime benefit could be reduced substantially! This is not a decision to be taken lightly.
As 2020 gets underway, the COVID-19 pandemic has impacted us all in one way or another. Business downturns, rising unemployment, and investment portfolio losses may be causing Americans over the age of 62 to rethink their Social Security claiming decisions. Individuals who were once been comfortable with the idea of claiming their benefits at 70, may now be questioning that decision if the earnings or portfolio gains that were going to support them during the delay have mostly gone away. As they contemplate digging deeper into their own pockets to meet essential living expenses, they may be questioning the wisdom of delaying Social Security.
So the question that I am hearing more often these days is, "Does it still make sense to claim my Social Security benefits at the age of 70 if it means drawing from my investment portfolio which is currently down in value?" I strongly believe that when you start taking Social Security is a decision that should not be based on portfolio values or investment returns. The main focus should be on your spending need and how it fits into your overall financial plan.
While this “safety net” of sorts could be an appealing avenue to replace the income you may have lost due to the current pandemic, this is a complex decision with many factors that must be considered carefully. Review the considerations below, and talk to your financial advisor to determine which may be the right option for you as you navigate these uncertain times. Talking with a professional could prevent you from missing out on hundreds of thousands of dollars during your lifetime and possibly your spouse's as well.
Considerations to Make Before Taking Social Security During COVID-19
If you weren’t already planning on claiming your Social Security benefits soon, then take the time to review your other options first. While you are eligible to begin receiving reduced benefits at age 62, every year you wait until age 70, your benefits will increase. While it’s tempting to take the money now, you could be missing out on thousands of dollars in future Social Security benefits.
Is There Other Income I Can Utilize?
If you’ve been saving diligently for retirement, you may already have the funds tucked away to get you through the foreseeable future. Review your 401(k) and IRA accounts, and remember to account for income through any pension plans you may have through work. After taking stock of these accounts and the value of your emergency fund, you may find out that claiming your Social Security benefits early is not even necessary. Even putting off claiming your benefits by six months or a year could make a considerable difference in your future benefits.
It’s also important to consider that if you’re earning less now than you were in previous years, you’ll likely be in a lower tax bracket come tax season 2020. This would make now an advantageous time to tap into your retirement savings accounts, as your tax obligation on this income may be lower than if you had worked full-time in a normal year otherwise.
Have I Applied for Unemployment Benefits?
The CARES Act was passed at the end of March in response to the detrimental financial impact COVID-19 has had on the U.S. Economy. As a part of this legislation, the government boosted unemployment benefits, offering eligible unemployed individuals an additional $600 per week for four months on top of their normal unemployment benefit amounts. In addition, this bill allows unemployed individuals to receive benefits for an extended period of 13 weeks. 1
If you were laid off or furloughed as a result of COVID-19 and have yet to look into receiving unemployment benefits, you may want to do so immediately. This income may be sufficient in covering your expenses until you’re able to work again.
What if My Other Options Are Limited?
It may be necessary to begin claiming Social Security benefits early if you’ve exhausted other resources, or you do not have adequate savings to begin with. For example, your primary alternative may be to remove funds from your portfolio. But with the onset of COVID-19, markets are volatile and values have dropped significantly. If at all possible, it may be better to leave your assets where they are as long as possible in an effort to recoup recent losses when the market recovers. Either way, this is a decision that you will want to make with your financial advisor first.
In another instance, if your only other alternative is to rack up high-interest debt, taking the Social Security benefits early is almost always going to be the preferred choice. Falling into a deep hole of debt is not an easy position to overcome, and it’s not an ideal way to start your retirement.
Important Notes About Claiming Social Security Early
If you do choose to take Social Security early to help ease the financial burden of losing your job, there are a few important things to remember.
The Impact of Working While Receiving Social Security
What happens if you begin claiming Social Security, but you get your job back? If you begin working again or find a new job, you may be subject to having a portion of your benefits withheld. This would be based on how much you are making above the Social Security Administration's (SSA) exemption limit. The SSA uses a retirement earnings test to help determine this amount. 2
Withdrawing Your Application to Receive Social Security Benefits
You could choose to withdraw your application for benefits within 12 months of becoming entitled to retirement benefits. For example, say you’ve chosen to take benefits now in the midst of COVID-19 because you were furloughed or laid off. A few months from now, your financial situation has turned around and you are back to work again. With some careful consideration, you could choose to withdraw your application.
This would mean you would stop receiving Social Security benefits, and they would essentially be “reset”. Any future date you choose to begin receiving them again would be the date that determines how much you would receive going forward. If you choose this route, however, it is important to note that you would be required to pay back any benefits you had already receive.3
While claiming Social Security benefits now to address your sudden loss of income may be tempting, it is important to take some time and consider all of your options thoroughly. I cannot stress enough how important this decision is to your and your spouse's financial future. While it may be the best decision for some, for others it could be unnecessarily robbing their future retirement. If you find yourself in this difficult position, work with your financial advisor to find the right option for you and your spouse. Your future self will thank you.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.