Should You Take Social Security Early in Light of a COVID-19 Related Layoff?
Just entering the workforce or winding down toward retirement - it doesn’t matter where you are in your career, it’s likely COVID-19 has made its mark on your professional and financial life. But for those between the ages of 62 and 70, you have the opportunity to begin claiming your Social Security benefits, whether you were planning to or not. This “safety net” of sorts could be an appealing opportunity to replace the income you may have lost due to the current pandemic, but this is a decision that shouldn’t be taken lightly. 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.
Considerations to Make Before Taking Social Security During COVID-19
Before you make any moves to claim your Social Security benefits, take the time to review your other options first. While you’re eligible to begin receiving benefits at age 62, for every year you wait until age 70 (the maximum), your benefits will increase at a rate of roughly 8% per year! You would be hard pressed to find that rate of return elsewhere, especially when the payout is both guaranteed by the Federal government and indexed to inflation! While it’s tempting to take the money now, you could be missing out on a much higher level of monthly income for the rest of your life!
Are There Other Sources of Income That You Can Tap Into?
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 401k and IRA accounts, and remember to include income from any pension plans you may have through work. Also be sure to include any emergency funds you have. Hopefully, after you add up these resources you may determine that claiming Social Security benefits early is not necessary.
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 when it comes time to pay your 2020 taxes. That might make now an advantageous time to tap into your retirement savings accounts (your IRA or 401k), as your tax obligation on this income may be lower than if you had worked full-time as in a normal year. Under the CARES Act passed in late March, you may be able to withdraw up to $100,000 from your IRA or 401k and spread out the taxes on the withdrawal over three years.
Have You Applied for Unemployment?
The CARES Act also boosted unemployment benefits, offering eligible unemployed individuals 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. Also, for the first time, unemployment benefits were broadened to include the self-employed.1
What if Your Other Options Are Limited?
If you do not have sufficient tax-deferred savings (in an IRA or 401k) or taxable savings, you could consider selling assets, such as a vacation home, boat, or extra car. And of course, anything you can lower your expenses will help. However, if your only other alternative is to rack up high-interest debt, taking the Social Security benefits early is likely to be a better choice. Falling into a deep hole of debt is not an easy position to overcome, and it’s not any way to start your retirement.
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 withheld, and it could be a very large portion. Tax rates on Social Security benefits quickly become painful even at fairly modest levels of income. The rates are based on “combined income” which is defined as your adjusted gross income (income from employment, interest, dividends, etc.) plus nontaxable interest income (from municipal bonds) plus half of your Social Security benefits. If your “combined income” is between $25,000 and $34,000 ($32,000 and $44,000 for couples) you could owe income tax on as much as 50% of your Social Security benefit in retirement. When your income exceeds $34,000 ($44,000 for couples), you may need to pay income tax on as much as 85% of your Social Security income.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’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 would essentially “reset” your benefits to what they would have been had you not started taking them. That is, your buildup of benefits from delaying them would revert back to the normal rate. If you choose this route, however, it’s important to note that you would be required to pay back any benefits you had already received.3 Ouch!
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. For more information on Social Security benefits claiming strategies, click here.
This content is developed from sources believed to be providing accurate information, and provided by Sapient Investments. 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.