The COVID-19 crisis hasn't just had a health-related impact; it's also caused a world of financial hurt. Not only did U.S. unemployment levels reach record highs in both April and May, but back in March, stocks plunged into bear market territory, taking retirement plan values down with them.
Between Jan. 31 and March 31, the average retirement plan balance fell 10% or more among savers aged 60 and under, according to Personal Capital. Specifically, savers in their 60s -- those who are more likely to be on the cusp of retirement -- had an average plan balance of $931,638 before the pandemic, which fell to $837,183 by late March. That's a $94,455 loss on paper (or on screen) -- a loss that's perhaps not set in stone, but unsettling nonetheless.
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If your IRA or 401(k) lost a lot of value due to COVID-19 and you're right on the edge of retirement, you may be wondering how on earth you'll make up for the income shortfall that will ensue if your plan takes a really long time to recover. And the answer could lie in claiming Social Security strategically.
Waiting to file can really pay off
Your Social Security benefits are calculated based on your wages during your top 35 years of earnings, and you're entitled to your full monthly benefit based on your wage history once you reach full retirement age, or FRA. FRA is based on your year of birth, and it's either 66, 67, or somewhere in between.
Many seniors claim Social Security at FRA to lock in their full monthly benefit as soon as possible, but you actually don't have to sign up at that point. Rather, you have the option to delay your filing past FRA and score an 8% boost in your benefits for each year you hold off, up until age 70.
Say, for example, that you're starting at a much lower retirement plan balance than you were looking at in February, before the market tanked. It could take a year or two for your plan value to come back up. Or it could take five years. We really don't know.
While the stock market has recovered a lot of the value it lost back in March, health experts have warned Americans to brace for a second wave of COVID-19 infections. If that were to happen, it could send stock values plummeting once again. In other words, retirement plan values may not fully recover until the pandemic is far behind us, and right now, we don't know how long that will take.
The good news, however, is that you may be able to compensate for a lower retirement plan balance by delaying your Social Security filing. Say you'll be reaching your full retirement age of 66 at the end of the year, so your initial plan is to work for the rest of the year and then call it quits. If your retirement plan balance doesn't improve by the time 2020 comes to a close, you can switch gears and continue working, all the while delaying Social Security and growing your benefit.
Then, you can reassess in six months, and six months after that. If your retirement savings are still down, you can keep plugging away, all the while delaying Social Security and increasing your benefit in the process.
Once you reach age 70, however, there's no sense in delaying your filing, because you won't grow your benefit any further. But if you do manage to postpone your filing between an FRA of 66 all the way until 70, you'll wind up with a monthly benefit that's 32% higher -- for life.
To apply some numbers, say you're entitled to $1,500 a month at FRA, which, for you, is 66. If you hold off on filing for a year, you'll be entitled to $1,620 a month instead. Wait four years, and that $1,500 monthly benefit becomes $1,980. Even if your retirement plan somehow doesn't regain its value by then and you can't delay retirement any longer, you'll be left with a much higher Social Security benefit to compensate.
Of course, in an ideal world, your retirement savings will recover quickly and you won't have to shift your plans too substantially. But a COVID-19 world is not an ideal world, and right now, it's the one we're all stuck living in. And difficult as it may be to see that your hard-earned savings are worth a lot less than they were just months ago, you can take comfort in the fact that if your account's recovery is slow, you have the option to delay Social Security and compensate with a more generous monthly benefit.
