Where you are winding down to your retirement or happen to be just entering the workforce - COVID-19 has made its mark on your professional and financial life. But for the latter group, those between the ages of 62 and 70, you have the opportunity to begin claiming your Social Security benefits, even though you may not have been planning to take them at this point. Social Security is like a “safety net” of sorts and could be appealing if you are looking to replace any income lost due to the current pandemic, but this is a decision that shouldn’t be taken lightly. Although it may be the low hanging fruit, you should, at a minimum, consider the questions listed below, and talk to your financial advisor to determine which may be the right option for you as you navigate these uncertain and unprecedented times.
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’re eligible to begin receiving 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. Depending on other assets, it may or may not be most beneficial for you to take your benefit early.
Is There Other Income I Can Use?
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), 403(b) and IRA accounts, and remember to account for income through any pension plans you receive through work. After reviewing all of your retirement accounts along with any emergency funds you have saved, you may determine that claiming Social Security benefits early is not necessary or even the best idea. Putting off claiming your benefits by six months or a year could make a massive difference in your future benefits.
It’s also important to consider things from a tax perspective. If you’re earning less now than you were in previous years, chances are, you’ll be in a lower tax bracket come tax season 2020. Lower taxes could make this year 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?
The CARES Act was passed at the end of March in response to the pandemic and economic impact COVID-19 has had on American families. As a part of this new legislation, the government boosted unemployment benefits, offering eligible individuals who filed for unemployment an additional $600 per week for four months on top of their normal 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 not applied for your unemployment benefits, you should do so immediately. This income may be sufficient in covering your expenses until the economy gets back on track and 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 don’t have much savings and retirement accounts. For example, your primary alternative may be to remove funds from your portfolio. But as most of us are aware, since the pandemic took hold, markets have been volatile and account values may have dropped, sometimes significantly. Due to the effects of sequence of returns, this would not bean opportune time to draw on those funds. If at all possible, it may be better to leave your assets where they are in an effort to allow them to possible grow back over time. Either way, this is a decision you’ll 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. Starting your retirement under a mountain of debt is most likely not going to lend itself to a successful retirement. Debt is one of the hardest things to overcome in personal finance.
Important Notes About Taking 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 taxed. This would be based on how much you are earning above the SSA’s exempt limit. The SSA uses a retirement earnings test to help determine what that earnings threshold is.2
Withdrawing Your Application to Receive Social Security Benefits
You could choose to withdraw your application for benefits within 12 months of receiving Social Security benefits. For example, If you elected to file for benefits now in the midst of COVID-19 because you were furloughed or laid off. A few months from now, you may be offered back your job or a new job. Now your financial situation has turned around and you’re earning again. With some careful consideration, you could choose to withdraw your application.
This would mean you’d stop receiving Social Security payments, and it’d essentially “reset” them. The future date you choose to begin receiving benefits again, would be the date that determines how much you receive. But buyer beware ,If you choose this route, it’s important to note that you would be required to pay back any benefits you had already received.3
While claiming Social Security benefits now to address your sudden loss of income may be tempting, it’s important to take some time and consider all of your options. It may be the best move for some, but others could be robbing their future retirement without a need to. If you find yourself in this difficult position, you do not have to travel this path alone, we are here to help. Work with your financial advisor to find the right option for you and your spouse.
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|About the Author|
James M. Comblo , CFF
is a Partner and the Chief Compliance Officer at FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients accomplish their dreams both with investments and their personal lives. To learn more about him click here.
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