Morgan Stanley private wealth adviser Mary Deatherage joins Barron's Roundtable to discuss what retirement savings options will help generate income in a low-yield environment.
The COVID-19 pandemic is causing lots of older Americans to change their long-term financial plans. In fact, a good 68 million people are altering their decisions in light of the ongoing crisis. If you're one of them, you may be thinking about claiming Social Security early rather than waiting until full retirement age (FRA) to file.
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The upside of claiming Social Security at FRA is that you'll get the full monthly benefit you're entitled to based on your earnings record. File early, and your benefits will shrink for life. Tempting as it may be to sign up for Social Security before FRA due to the pandemic, here are three reasons not to.
1. Retirement plan values have largely recovered
Earlier in the year, the stock market crashed in response to the start of the pandemic, taking a lot of IRAs and 401(k)s down with it. But recently, Fidelity reported that retirement plans have recovered nicely from the downturn that hit earlier in the year.
If you've lost your job prior to FRA, it could make more sense to take some withdrawals from your savings than to claim Social Security early and lock in a lower monthly benefit for life. This especially holds true if you have a robust nest egg whose value isn't down at all.
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2. Unemployment benefits could get you through a period of joblessness
Unemployment benefits will only replace a portion of your missing paycheck. But workers on unemployment could get some sort of boost once lawmakers agree what that number should entail. If that extra money comes through, you may find that your unemployment income is high enough to support yourself without having to resort to claiming Social Security ahead of FRA.
Currently, Republican lawmakers are proposing a $200 weekly boost to unemployment through September, after which benefits would replace 70% of lost earnings. Democrats, on the other hand, are calling for a flat $600 weekly boost for the remainder of 2020. And then there's President Trump's executive order calling for a $400 weekly hike to unemployment (which may only end up being a $300 boost in practice). There are some options on the table, so if you're out of work, it could pay to sit tight before you start collecting Social Security.
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3. You may have benefits withheld if your income has been reduced, not eliminated
Though many people have lost their jobs during the pandemic, others have only seen their income reduced. If you fall into the latter camp but claim Social Security early, you may end up losing a portion of your benefits anyway, depending on your level of earnings.
This year, you can earn up to $18,240 without having your job-related income impact your Social Security income. Once you exceed that threshold, you'll have $1 in Social Security withheld for every $2 you earn. This assumes that you haven't yet reached FRA. Once you're old enough to claim your Social Security benefit in full, you can earn as much as you'd like without having a portion withheld due to earning money from a job. But prior to that, you may not get access to your full benefit immediately anyway if you work and collect Social Security simultaneously.
Many older Americans are in a tough financial spot due to the COVID-19 crisis. Some are on the cusp of being forced into early retirement, while others are making plans to work longer to compensate for lost wages. If you're contemplating claiming Social Security early, you should know that there could be serious downsides to going that route, so it's worth exploring other options.
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