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Why Now Might Be the Worst Time to Claim Social Security Early

By Maurie Backman - Mar 14, 2020 at 11:01AM

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Given the state of the stock market today, you might want to reconsider if you were planning to take Social Security early.

The stock market has been crashing over the past few weeks as fears of the novel coronavirus sparked a massive sell-off. It's too soon to tell how long the onslaught will last, but it certainly puts older Americans in a very precarious position. Those who are set to retire soon no doubt plan to rely on their investment portfolios to pay their living expenses. And with 401(k) and IRA balances plunging due to this recent bout of volatility, it's safe to say that the typical senior who takes a retirement plan withdrawal is likely to suffer some financial losses in the process.

It's for this reason that now, more than ever, is a bad time to claim Social Security early. Doing so could slash a crucial retirement income stream at a time when you need it most.

An older man resting his hand on his chin as if deep in thought


Don't slash those benefits

Your Social Security benefits are calculated based on your 35 highest-paid years in the workforce. You're entitled to your full monthly benefit, based on that calculation, once you reach full retirement age, or FRA. FRA is either 66, 67, or somewhere in between, depending on the year you were born.

You're allowed to claim Social Security ahead of FRA -- you can do so once you turn 62. But for each month you sign up for benefits ahead of FRA, you'll slash them permanently in the process. Start taking benefits at 62 with an FRA of 67, and you're looking at a lifelong 30% hit.

Let's think about that in the context of what's happening in the stock market today. Many seniors have a large chunk of their retirement savings tied up in stocks (keeping in mind that it's actually advisable to retain stocks leading up to and during retirement, albeit at a much lower percentage than younger folks), which means their portfolios are worth less. Meanwhile, some seniors are right on the cusp of retirement.

But here's what might happen if you were to retire now and claim Social Security early: You'd lower your monthly benefit at the exact time you need access to more money, not less, to leave your retirement savings alone. By not tapping your portfolio, you buy yourself time to ride out the current downturn and let your investments recover. And that's crucial if your goal is to avoid running out of money in your lifetime.

Of course, this actually speaks to a bigger piece of advice: Don't retire right this very minute if you can help it. If you can sit tight for a few months and give the stock market time to recover, you may not take any losses in your retirement portfolio at all.

It pays to wait on Social Security

The more money you collect from Social Security in retirement, the more financial flexibility you buy yourself on a long-term basis. This recent bout of market volatility isn't the first of its kind. Downturns occur somewhat often, and while most are short-lived, some last longer. By not slashing your Social Security benefits, you'll have an easier time leaving your investments alone whenever you need to.

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