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The COVID-19 pandemic has, in short order, upended the U.S. economy and shocked the financial markets, leaving widespread economic consequences in its wake. Few businesses or individuals have been spared, but among those most impacted are people nearing retirement. Declining retirement account values could force many to adjust their plans. Among the many critical decisions pre-retirees must now consider, or reconsider, is when they should start claiming their Social Security benefits.
If you’re on the path to retirement, you probably know your options, and you may have even decided on which option you should choose. But that was before the pandemic. Depending on your circumstances and how the stock market downturn has impacted your finances, you may need to revisit your options.
Know Your Social Security Options
The full retirement age (FRA) for purposes of claiming Social Security benefits ranges from age 65, for those born in 1937 or earlier, and gradually increases for those born from 1938 through 1942, becoming age 66 for those born from 1943 to 1954. After 1954, the FRA again increases each year until it reaches age 67 for those born in 1960 or later. Anyone can claim their retirement benefits as early as age 62 if they are willing to lock in a 30% reduction in benefits for life. For every year you wait to claim benefits, the amount of your monthly benefit increases 7% to 8%, up until age 70.
Waiting until age 70 can result in a significant increase in lifetime benefits if you expect to live long enough to enjoy them, and you are in a financial position that allows you to delay your benefits. There’s no one-size-fits-all answer as to when a person should claim benefits, but for many pre-retirees, COVID-19 may complicate the equation.
How the COVID-19 Crisis Could Impact Your Filing Decision
During times of economic distress, the number of people claiming early benefits tends to increase. For example, by the time the stock market hit bottom and the recession ended in 2009, more than 42% of 62-year-olds started claiming Social Security benefits, up from 37% in 2008. Those hardest hit by economic downturns are most likely to claim benefits early. The longer an economic downturn lasts, the more people turn to their Social Security benefits as a safety net.
When Your Retirement Investments Take a Hit
If you’re within a couple of years of retirement and your retirement accounts have been adversely impacted by the market downturn, you may need to delay your target date by a couple of years, since it could take several years for the stock market to recover its losses. So, if you need to draw down income from your equities portfolio, you risk locking in losses, which reduces its capacity to generate sufficient lifetime income.
If you delay your retirement date, and delay your Social Security benefits, you may be able to increase the amount of your monthly benefit.
When You Lose Your Job Due to COVID-19
If you are one of the more than 20 million Americans who have lost their jobs in the last few weeks, you may be forced into early retirement. This could be especially concerning if your retirement account values have declined. If your savings can’t generate the income you need, you may have to claim Social Security benefits early to fill the gap.
Alternatively, for the next few years, you could draw down what you need from your savings to meet your cash flow needs and delay your benefits to lock in a higher lifetime benefit.
When Your Health Outlook Changes
Another consideration in determining when to claim your benefits is your health outlook. If you have health issues or a family history of health issues, and you don’t expect to live out your full life expectancy, it may make sense to claim early benefits. You will receive a smaller benefit, but you could receive more over your lifetime than you would if you delay your benefits. For many people with health issues, their higher health-care costs may warrant taking early Social Security benefits.
When You Might Regret Claiming Early Benefits
If you are considering taking early benefits due to changing circumstances, it’s important to note that it doesn’t have to be a final decision. If your financial circumstances change for the better in the near future and you don’t want to lock yourself into a reduced benefit, you are allowed a one-time do-over. You can actually undo your early benefits claim within one year. You will have to repay all of the money you received, but you can then re- file for your benefits at any time in the future. This option is available to anyone taking early benefits, but it should be considered in the context of your near-term financial outlook and your retirement plan.
You may be fortunate enough to skate through this crisis unscathed, which means you can stick to your original plan for claiming benefits. This may still be a good opportunity to revisit your options to ensure you fully understand the ramifications of filing at different ages and that your current plan meets your lifetime income needs.