The coronavirus pandemic has wreaked havoc on the economy and on the daily lives, health, and finances of millions of people. Tens of millions of Americans are out of work, and many investors have watched their savings take a serious hit over the last couple of months.
If you're nearing retirement age, COVID-19 may have put you in a tough spot. Flexibility is key right now, because nobody knows exactly what the future holds. At the same time, though, it's important to avoid making any hasty decisions that can cause long-term consequences.
Social Security benefits are an integral part of many Americans' retirement plans, so it's wise to ensure you're making the best choices that will maximize your monthly checks. And there are two mistakes, in particular, that could potentially cost you big time over the long run.
1. Claiming early out of fear
You can begin claiming benefits as early as age 62, but your checks will be smaller than if you'd waited longer to file. In fact, if you have a full retirement age (FRA) of 67 years old and you claim at 62, your benefits will be permanently reduced by 30%.
These are uncertain times, and it's normal to be a little worried about what the future may look like. However, if you're claiming benefits as soon as possible because you're afraid you may lose them later, that could be a mistake. The Social Security Administration (SSA) is not cutting benefits as a result of COVID-19, so your monthly checks will still be there for you if you decide to wait a few years to claim.
There is a chance that benefits could be reduced within the next few decades, but claiming early won't solve that problem. The SSA Board of Trustees estimates that its cash reserves will be depleted by 2034, at which point payroll taxes will only be enough to cover around 76% of future benefits. While that may be concerning news, claiming early won't change the fact that your benefits could be cut in the future. If anything, that just means you'll be collecting even less money per month if your benefits are reduced by claiming early and then cut again later due to the SSA's cash shortage.
2. Delaying benefits when you can't afford it
While claiming early may be a mistake, delaying benefits also has its downsides in some situations. The main advantage of waiting to file for benefits is that you'll receive bigger checks each month -- up to 32% extra on top of your full benefit amount if you have a FRA of 66 years old and wait to claim until age 70. But if you can't afford to wait several years to begin claiming, you could rack up a host of other problems.
For example, say you lost your job recently due to the pandemic, and you were forced to retire earlier than you expected. Delaying benefits might sound like a smart idea because it could result in hundreds of dollars extra per month, and you'll be collecting these bigger checks for the rest of your life.
However, if you have no income and your savings run dry before you're ready to begin claiming benefits, you may have to rack up credit card debt or take on loans just to pay the bills. Debt can become expensive quickly, and it can also affect your credit score and other areas of your financial life. Depending on how much debt you incur, you may be making payments for the rest of your life. In this case, you're probably better off claiming benefits early and avoiding debt in the first place.
When is the right time to claim?
If claiming early and delaying benefits can both be problematic, when should you begin claiming? The answer will depend on your situation.
First, look at how much you have in savings as you're nearing retirement age. If you have a robust retirement fund and don't necessarily need the boost in benefits, you might choose to claim early so you have a little extra cash to spend earlier in retirement. Or, on the other hand, if you lose your job and desperately need the money, claiming early can make it a little easier to make ends meet.
Delaying benefits might be a good choice if you don't have much in savings, because you'll be able to rely on those bigger checks for the rest of your life. This option is best suited to those who can continue working until they're ready to claim, however, because it may not be feasible to retire and then wait several years to begin claiming benefits.
COVID-19 has affected nearly every aspect of our daily lives, and it may also have an impact on your retirement strategy. Even amid the coronavirus pandemic, though, it's important to ensure you're making wise financial choices. By avoiding these two Social Security mistakes and creating a strategy behind when you claim, you can maximize your monthly checks in retirement.