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If you’re laid off in the COVID-19 economy and you’re an older adult, you might be wondering: Am I going to have to take Social Security earlier than I planned? How much will that reduce my monthly benefits in the long run? What happens if I get a new job?
For many older adults, claiming Social Security early would be a big mistake — a mistake made by many older workers who lost jobs in the Great Recession.
“In 2008/2009, the jobs just were not there for older workers, and they had to claim Social Security early. The bad part about that is it locks you into a low monthly benefit,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. In 2009, one year after the stock market plummeted, 42.4 percent of 62-year-olds signed up for their benefits, up sharply from the 37.6 percent of 62-year-olds who signed up in 2008, Center researchers found. (Sixty-two is the youngest age at which you can claim Social Security retirement benefits.)
If you do go down the road of taking Social Security early, keep in mind that you can start Social Security early and stop it later to mitigate the damage to your income stream. We’ll explain how. First, consider these options if you need cash.
Get your $1,200 economic stimulus payment ASAP. The Internal Revenue Service launched a new tool today that lets you update your direct deposit information to get your payment quicker and track when to expect it. You’ll need your 2018 and/or 2019 tax returns on hand. There’s a separate tool for non-filers. Both are available at this IRS link.
Get unemployment insurance to tide you over for a while. Unemployment claims are skyrocketing, so get in line. The good news is that part of the economic stimulus includes bonus $600-a-week federal payments for up to four months on top of what you’ll normally get in state benefits. Also, the stimulus package extends benefits to gig workers, freelancers and the self-employed who normally aren’t eligible. For more details, see What You Need To Know About Expanded Unemployment Benefits For COVID-19.
Get a loan, or ask for a gift, from a family member. Any individual can give another up to $15,000 a year with no tax consequences. Gifts beyond that require a gift tax return, but no tax is due, the gift is just counted against the amount you can give away during your lifetime gift tax free, which is now over $11 million. You can accept a loan from a family member for up to $10,000 with no paperwork. Above that amount you should put together a written loan agreement that states interest will be charged —at least the minimum IRS-set “applicable federal rate” for the month when you sign the agreement. For more details, see The Tax Landmines Of Lending To Family Members.
Tap your retirement accounts. The stimulus package enhances the rules around retirement account loans and withdrawals for folks impacted by the COVID-19 downturn. The biggest change: The 10% tax penalty for early withdrawals before age 59 1/2 is waived for 2020. For more details, see A Couple Can Take $400,000 From Their Retirement Accounts Penalty-Free Under COVID-19 Tax Relief.
Take Social Security early. You can claim your benefit at full retirement age (what age depends on when you were born which the Social Security Administration details in this chart; it’s age 67 if you’re born in 1960 or later), early at age 62 (for reduced benefits) or as late as age 70 (for a boost). While individual circumstances vary, retirees often do best by delaying claiming Social Security until age 70, which gets you the maximum monthly benefit for the rest of your life.
Should you take Social Security early before raiding your retirement accounts? “In normal times you want to use your 401(k) to support yourself to delay claiming Social Security," Munnell says. “It must be true in these tumultuous times.”
“In general, the return on Social Security is much higher. The return on a 401(k) on a risk adjusted basis is zero,” says Larry Kotlikoff, an economist at Boston University (and long-time Forbes contributor) who developed the calculator MaximizeMySocialSecurity and an advanced financial planning calculator available at Maxifiplanner.com.
What happens if you turned 62 in January and claimed Social Security retirement benefits? Your annual benefit (for life) will be 30% lower than if you’d waited until full retirement age to claim and 45% lower than if you’d waited until age 70, Kotlikoff calculates.
What if you claim Social Security retirement benefits early and then get a new job? “Nobody should worry about going back to work!” Kotlikoff says. There’s a complicated earnings test that takes away your benefits if you earn too much and haven’t yet reached full retirement age, but for the overwhelming majority “if you take Social Security early and then happily get reemployed, that won’t hurt you in the long term,” he says.
Why? Although you’ll never get back the benefits you lost to the earnings test, once you reach full retirement age, the reductions to benefits you incurred by filing early will disappear for any months you didn't receive Social Security benefits due to the earnings test.
Here’s an example, courtesy of Kotlikoff, of how, in a pinch, you can take Social Security early, then suspend and still get delayed retirement credits.
Take a single 62-year-old man who has $400,000 in a money market account and $400,000 in a 401(k) and was making $100,000 before he was laid off in January. He files for his Social Security retirement benefit at 62, the earliest he can do so, putting his benefit at $2,027 per month from February through December. He then gets another job in 2021 at 63 for $70,000 annually, which he continues working at until his full retirement age of 66 and 8 months. He collects his retirement benefit from 62 to 63 and then the earnings test effectively suspends his benefit at 63, when he starts working again. He voluntarily suspends his benefits at full retirement age, drawing down his 401(k) between his full retirement age and 70, when he reinstates his retirement benefit increased by delayed retirement credits. (Note that until he reached his full retirement age of 66 and eight months, he was not technically allowed to suspend his benefit. But since he earned too much to collect the benefit, the effect is similar to having suspended it.)
By suspending his retirement benefit at his full retirement age, his lifetime discretionary spending through age 100 will be $1,393,419, compared to $1,275,396 if he hadn’t suspended his retirement benefit at his full retirement age. That's a difference of $118,023 that he earns by voluntarily suspending his retirement benefit between full retirement age and 70 and drawing down his 401(k) instead.
But what if he didn't file for his Social Security retirement benefit at all until he turned 70? He’d need to draw down his 401(k) by $50,000 for an additional year in 2020 but his lifetime discretionary spending in that case would be higher at, $1,473,687.
In retrospect, our 62-year-old would have done the best financially by drawing down his 401(k) instead of claiming Social Security now. But since he didn’t know whether he’d find that new job, he was reluctant to draw down his savings. He was able to minimize the damage of claiming Social Security early, by successfully hunting for a job after the economy recovered. Bottom line: Claiming Social Security early can be an expensive move, but it’s not an irrevocable decision.
