Coronavirus and Social Security: How to Avoid Claiming Benefits Now
Six-point checklist to help preserve your maximum retirement income
Economic havoc unleashed by the coronavirus makes it both reasonable and necessary to rethink long-held financial plans, if it means being able to pay the bills today. A crisis puts everything on the table.
Or back on the table if you’re between the ages of 62 and 70 and have yet to start claiming Social Security retirement benefit.
Every month you wait to claim between ages 62 and 70 earns you a higher eventual benefit. Wait until 70 and your payout will be 76% higher than the reduced benefit you are entitled to starting at age 62. The extra income from waiting to claim Social Security can be $100,000 or more.
That said, a job loss, steep losses on stock investments and other factors may have you wanting to claim now. Here’s how to avoid the urge:
If your household is eligible for the $1,200 per-adult payment that Congress authorized, that money should arrive (via direct deposit or a snail mail check) soon. You can use that money now to cover most urgent bills as you plot your longer-term strategy.
Reduce your payments for a few months. Lenders and credit card issuers — sometimes prodded by federal mandate — are offering customers the ability to suspend or reduce payments for at least a few months. The thing is, in most instances you must contact the lender/business and ask for the help. Patience is needed. Phone lines and chats are jammed. Stay calm and persistent.
Collect all the crisis aid you are entitled to. The CARES Act that Congress passed provides jobless pay to workers not typically covered by standard unemployment. For instance, anyone self-employed is eligible for unemployment.
Your base unemployment benefit is set by your state, based on your previous earnings. The stimulus package adds an additional $600 a week—yes, per week. Everyone collecting unemployment is eligible for the extra $600.
All of this runs through your state’s unemployment office. Again, patience and perseverance are valuable tools. You’ve no doubt heard or read about the record number of people filing for unemployment. That’s creating a logjam online and on the phone. Keep at it, and know that once you do get through and your application is processed, your payments will likely be retroactive to when you became unemployed.
Tap your emergency fund or bonds. If you have other resources you can use to pay for essential living costs, you might consider tapping those funds for a few months and see how this crisis evolves. If you are going to tap retirement investments, pull money from bonds, not stocks. You want to give your stock investments time to recover their recent losses.
Using other money rather than tapping Social Security is smart, given how Social Security benefits are calculated. A key factor is your full retirement age (FRA), the age when you qualify to collect 100% of your Social Security benefit. For anyone who has yet to claim Social Security, your FRA is somewhere between 66 and 67. (You can find your exact FRA at the Social Security website.)
If you start your benefit before you reach your FRA, you will receive less than 100%. Depending on your FRA, if you start at age 62 your benefit will be 25% to 30% lower than what you will be entitled to at your FRA. Another way to look at this is if you don’t claim Social Security at age 62 and wait until your FRA, you are guaranteed a risk-free return (higher benefit) of 25% to 30% over a period of no more than five years. Risk-free is key here. If you think you can earn anywhere near 25% to 30% over the next five years investing on your own, that is going to require you to take on plenty of risk, with no guarantees it will work out.
For anyone born in 1943 and later, each year beyond your FRA until you reach age 70 earns you a guaranteed 8% benefit increase. Someone with an FRA of 67 will earn 124% of their FRA if they wait until age 70 to start. That’s why it’s worthwhile to see if you can delay as long as possible; the higher benefit you get for waiting will be incredibly valuable income over what is likely to be a long retirement, given the likelihood you may live into your 90s.
Married? Consider having the lower earner start receiving a benefit. The one cardinal rule for married couples is that the higher earner should delay claiming as long as possible. This ensures the surviving spouse will be able to claim the largest possible benefit. It’s less important when the lower-earning spouse starts. Sure, later is always better. But if you can manage right now by having the lower earner start benefits and leaving the other spouse’s benefit growing, that’s a solid move.
Take Social Security now, with the goal of stopping payments within a year. OK, if you’ve run through all the other options and you’re still coming up short, claiming your Social Security benefit now may be the right move. But you should know about an interesting offer from Social Security: Once you start receiving your benefit you can stop it any time within the first 12 months (file Form SSA-521), repay what you have already received, and that will reset the clock on earning delayed-claiming benefits.
Assuming the economy reopens in the coming months, you may be able to get back to work, stop your benefit payouts, repay what you’ve received, and then be back to where you were before the coronavirus crisis: delaying your Social Security benefit as long as possible to earn the highest possible benefit.