If you're in your 60s and concerned about the economic turmoil coronavirus is causing, you may be considering claiming Social Security retirement benefits.
This may seem like an attractive option if you've lost your job, had your hours cut, or have seen your retirement investment balance fall. And you can indeed start your benefits as early as age 62.
However, before you go ahead and file for them, there are a few very important things to consider.
Filing early could reduce the amount of benefits
If you're considering claiming benefits amid the COVID-19 turmoil, be aware that Social Security is set up so the earlier you claim, the smaller your monthly checks will be.
Every retiree has a standard benefit they'll receive if they claim at full retirement age (FRA) (between 66 and 67). If you start benefits even a month before, you're subject to a lifetime reduction in monthly checks due to early filing penalties. If you start benefits after FRA, on the other hand, you earn delayed retirement credits that raise the amount of your monthly check for each month you wait until age 70.
You could also end up cutting your benefits if you've worked less than 35 years. That's because Social Security determines your benefit using a formula that factors in average inflation-adjusted wages in the 35 years you earned the most. If you work less, the formula doesn't change -- your average is simply lowered by the inclusion of some years of $0 wages.
If you don't have 35 years of work, seriously consider putting off claiming benefits until you do so you can avoid this. It's difficult if the Great Lockdown has left you unemployed, but even doing some part-time work gives you some earnings instead of having years of $0 wages factored into your average.
If you happen to be at peak earnings now, even during the pandemic, you may also want to stick it out a little longer, even if you've already worked for 35 years. That would enable years of higher earnings to replace lower-earning ones, boosting your average wage.
Working while receiving benefits could also affect the size of your checks
If you're thinking about claiming benefits due to an income cut, you may not get as much money as you expect. And if you've lost your job but may go back to work, getting rehired could affect your Social Security checks.
That's because working can lead to a reduction in benefits if you haven't yet hit FRA. Here's how this works:
- If you won't reach FRA in 2020 and you work, you'll lose $1 in benefits for every $2 earned above a $18,240 annual limit. If you work just part of the year, you're subject to a monthly limit of $1,520 during the period you get your Social Security checks.
- If you'll reach FRA in 2020 and work while getting benefits, you'll lose $1 in annual benefits for every $3 earned above $48,600. However, any money you earn after reaching FRA doesn't count toward your annual earnings limit.
The earnings limits change annually, but the $1 reduction for every $2 or $3 in excess earnings doesn't. So, if you claim benefits now, and your hours pick up again later, your benefits will decline.
The good news is, if you retire mid-year after working, a special rule applies to allow you to receive benefits even if you hit your earnings limit already. If you worked through April 30, for example, you could get your benefits in May and beyond as long as your earnings don't exceed the monthly limit.
You also don't lose forfeited money forever. At full retirement age, your benefit amount is recalculated, and your payments go up slightly to make up for the missed benefits over time. But that doesn't help you in the short term if you needed extra money to make ends meet.
It's really difficult to undo an early claim for Social Security benefits if you change your mind later
If you panic and claim Social Security because of a temporary job loss, income cut, or reduction in your investment account balance, and the market later recovers, or you get rehired, it's hard to undo the early claim and resulting reduction in benefits.
In fact, the only real option if you regret an early filing is to rescind it within 12 months of claiming benefits. You have to pay back all benefits you received, though, and you can only rescind a claim one time.
Claiming benefits with the intention of rescinding your claim if things improve can be a big risk if you aren't confident you can pay back the full amount. Think carefully about whether you're actually willing to accept smaller checks for life before you act.
Don't rush into claiming Social Security during the coronavirus crisis
Sometimes, there's really no other option besides claiming Social Security. If you don't have the income you need because the coronavirus lockdown affected your investments or your job, you may feel like you have to start your benefits.
But before you do, consider the impact this will have over the long term. And if you decide it's not the best financial move, explore other options, such as claiming unemployment or other government assistance, before you make a decision that would be difficult to undo.