Commentary by Jodi Davis, April 2020
If you are at least age 62, you are eligible to start receiving Social Security benefits. But for many people, it is often a wise strategy to defer those benefits until at least Full Retirement Age (“FRA”) if not beyond to increase the amount of monthly benefits. This is particularly so if you are still working and may not need the additional income. Also, if you claim benefits prior to FRA, $1 in benefits are withheld for every $2 earned over the annual threshold (currently, $18,240).
But what if you have recently been laid off due to COVID-19 and your household income has come to a screeching halt? If you are in that situation, you may want to consider claiming your Social Security benefits early to provide much needed cash flow. While claiming an early age benefit is not optimal, it is an immediate source of income that may truly be needed. And if you are not currently working, the annual earnings cap will not apply, and your benefits will not be withheld.
So, what’s the downside? Good question! If you claim benefits prior to full retirement age (FRA), your benefit check is reduced permanently. Unless you reverse your decision and pay back benefits within twelve months, you have essentially started a claim status and all benefits paid (current and future) are reduced. However, don’t let this stop you from claiming an early benefit if there are no other options available to meet budgetary demands.
But what happens if you are fortunate enough to return to work, especially in the not too distant future? You will then have two options to consider. First, if you no longer need the additional cash flow, you can choose to repay the benefits within twelve-month time of receipt. By simply filing a form with Social Security and attaching a check for the full amount received, your claim record is cancelled and recalculated as if you never started benefits.
Second, you can simply allow your W-2 income to exceed the earnings test. Although some of your Social Security benefits will be withheld, your FRA primary insurance amount will be recalculated for those withheld benefits, thus increasing your benefit formula while also improving your earnings record. Once you reach FRA, you can voluntarily suspend at any time and begin earning delayed retirement credits.
If, despite being laid off, you would still prefer to defer receiving Social Security benefits, you may have other options. First, consider a part time job in positions that are hiring during this pandemic crisis. Second, consider temporarily tapping cash reserves and pulling funds from liquid accounts, such as savings, checking and money market funds to fill in the budget. Be careful about obtaining funds from investment accounts; in this market, you may be selling low and thereby locking in losses.
Third, until you return to work, consider reducing your expenses to the bare minimum. Finally, postpone expenses that are not as time sensitive, such as travel, big-ticket purchases and lifestyle choices. Even small wins can make it easier to cover those bills that will not wait. If you ultimately conclude that filing for early benefits is your best option, be strategic in how you go about it. If married, to get income started now, the lower-earning spouse may want to go ahead and file early. This way, the higher earning spouse’s benefit can be maximized, while household income is still supplemented, and reductions for early claiming aren’t as significant as they would be for the higher-earning spouse. If you are divorced or a widow(er), auxiliary benefits may be your best option.
Be careful, the rules of the road need to be considered and it may be prudent to call our office for a full social security analysis, so you do not fall into filing traps. A full needs analysis will break down two or three scenarios to best suit your short-term and long-term income needs. As a financial planning firm, we will also look at filing decisions holistically, keeping in mind your long-term financial plan and goals. Clearly, our clients appreciate when we get creative and offer to tangibly improve their situation, and although these strategies may take time to put together and execute, it will be well worth it. This decision is important. We are here to walk you through these types of claiming decisions that could fill a short-term need but may have a long-term impact on the success of your retirement plan.
Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisor, Inc., a Registered Investment Advisor. The Kelly Group and Cambridge are not affiliated. 48 East Gordon Street, Bel Air, MD 21014.