When the COVID-19 outbreak initially hit the United States, most of us could not have imagined what a dramatic economic impact it would have. But with millions of Americans losing their jobs and countless older workers feeling financially insecure, the pandemic may be causing a shift in the way Social Security recipients claim their benefits.
An estimated 20% of Americans are now planning to delay Social Security, according to SimplyWise's July 2020 Retirement Confidence Index. And among those who have lost a job or been furloughed during the COVID-19 crisis, that percentage climbs to 30%. But while delaying Social Security may not be ideal, it's a smart move that could help a lot of people overcome the financial setbacks the pandemic may have caused them.
The upside of delaying Social Security
The downside of holding off on claiming Social Security is clear: You have to wait longer to collect the benefits that are rightfully yours. But waiting to file could help boost your retirement income in a very meaningful way -- for life.
Your Social Security benefits are based on your earnings during your 35 most profitable years in the workforce. From there, you can collect your full monthly benefit once you reach full retirement age, or FRA. FRA is either 66, 67, or 66 and a certain number of months, depending on your year of birth. But for each year you delay benefits past FRA, they increase automatically by 8%, up until you turn 70.
Now, let's say you're entitled to $1,500 a month in Social Security, which is pretty much what the average beneficiary receives today. If you delay your filing from an FRA of 67 all the way until age 70, you'll grow your benefits by 24%, turning that $1,500 monthly payment into $1,860 instead. That will, in turn, boost your annual retirement income by $4,320. And that's an important thing to do if the COVID-19 pandemic has caused you to fall behind on retirement savings.
Generally speaking, Social Security will only replace about 40% of your pre-retirement earnings, assuming you bring home an average wage. Most seniors need around twice that sum to live comfortably, which is why saving independently is so important. But if you're out of work -- or your hours and wages have been cut -- due to the pandemic, then you may not have the means to contribute to a retirement savings plan the way you normally would. And even if you are still collecting your regular paycheck, you may not feel comfortable socking a chunk of it away for retirement knowing full well that you could find yourself on the chopping block any day.
That's why making plans to delay your Social Security filing is a smart move, even if that wasn't your original intent. By boosting your monthly benefit for life, you can compensate for having less savings without having that impact your retirement lifestyle. And if waiting until age 70 to file doesn't work for you, land on a compromise. If you're only out of work for six to 12 months and are otherwise doing well on retirement plan contributions, you may find that delaying benefits for a year does the trick in making up for lost savings. But the fact that the option to delay and grow your benefits exists should, at the very least, give you peace of mind at a time when your financial picture may be less than rosy.