Should you take Social Security earlier than expected if you are made redundant due to COVID-19?
If you are laid off in the COVID-19 economy and are a senior, you may be wondering: am I going to have to take Social Security earlier than expected? How much will this reduce my monthly benefits in the long run? What happens if I get a new job?
For many older people, claiming Social Security early would be a big mistake – a mistake made by many older workers who lost their jobs during the Great Recession.
“In 2008/09 jobs just weren’t there for older workers, and they had to go to Social Security early. The downside is that it locks you into a low monthly benefit, ”says Alicia Munnell, director of the Center for Retirement Research at Boston College. In 2009, one year after the stock market crash, 42.4% of 62-year-olds subscribed to their benefits, up sharply from the 37.6% of 62-year-olds who subscribed in 2008, Researchers at the center have found. (Sixty-two is the youngest age at which you can claim Social Security retirement benefits.)
If you decide to take Social Security early, keep in mind that you can start Social Security early and stop it later to lessen the damage to your income stream. We will explain how. First, consider these options if you need cash.
Get your economic stimulus payment of $ 1,200 ASAP. Internal Revenue Service launched a new tool today which allows you to update your direct deposit information to get your payment faster and know when to expect it. You will need your 2018 and / or 2019 tax returns on hand. There are a separate tool for non-filers. Both are available on this IRS link.
Get unemployment insurance to help you for a while. Unemployment claims are skyrocketing, so line up. The good news is that part of the economic stimulus includes federal payments of $ 600 per week for up to four months on top of what you would normally get as state benefits. In addition, the stimulus package extends the benefits to concert workers, the self-employed and the self-employed who are not normally eligible. For more details see What you need to know about expanded unemployment benefits for COVID-19.
Get a loan or ask a family member for a gift. Any individual can donate up to $ 15,000 per year without tax consequences. Gifts beyond that require a tax return, but no tax is owed, the gift simply counts toward the amount you can give in your lifetime tax-free, which now exceeds $ 11 million. You can accept a loan from a family member of up to $ 10,000 without paperwork. Above this amount, you must prepare a written loan agreement stating that interest will be charged, at least the “applicable federal rate” set by the IRS for the month in which you sign the agreement. For more details see Landmine Tax Loans to Family Members.
Tap your retirement accounts. The stimulus package improves the rules around lending and withdrawing from retirement accounts for those affected by the COVID-19 downturn. Biggest change: The 10% tax penalty for early withdrawals before age 59 1/2 is removed for 2020. For more details, see A couple can withdraw $ 400,000 from their retirement accounts without penalty as part of the COVID-19 tax break.
Take social security early. You can apply for your benefit at full retirement age (the age depends on your date of birth details of Social Security Administration in this table; it’s 67 if you were born in 1960 or later), early to 62 (for reduced benefits) or up to 70 (for a boost). Although individual circumstances vary, retirees often do better by delaying their Social Security application until age 70, allowing you to get the maximum monthly benefit for the rest of your life.
Should You Take Social Security Early Before Looting Your Retirement Accounts? “Normally you want to use your 401 (k) to support yourself and delay your Social Security claim,” says Munnell. “This must be true in these tumultuous times.”
“In general, the performance of Social Security is much higher. The return on a 401 (k) on a risk-adjusted basis is zero, ”says Larry Kotlikoff, an economist at Boston University (and longtime Forbes contributor) who developed the calculator. MaximizeMySocialSecurity and an advanced financial planning calculator available at Maxifiplanner.com.
What if you turned 62 in January and claimed Social Security retirement benefits? Your annual (lifetime) benefit will be 30% less than if you waited until full retirement age to claim and 45% less than if you waited until 70, Kotlikoff calculates.
What if you apply for Social Security retirement benefits earlier and then find a new job? “No one should worry about going back to work! Said Kotlikoff. There is a complicated income test that takes away your benefits if you earn too much and have not yet reached full retirement age, but for the overwhelming majority “if you sign up for Social Security early and you are then happily rehired, it won’t hurt you in the long run, ”he says.
Why? While you will never get back the benefits you lost on the income test, once you reach full retirement age, any benefit reductions you made by filing early will disappear for every month. during which you did not receive social security benefits due to the income test. .
Here’s an example, courtesy of Kotlikoff, of how, in a pinch, you can take Social Security early, then suspend and still get deferred retirement credits.
Take a 62-year-old single man who has $ 400,000 in a money market account and $ 400,000 in a 401 (k) account and was making $ 100,000 before he was laid off in January. He files for a Social Security retirement pension at age 62 as soon as possible, bringing his benefit to $ 2,027 per month from February to December. He then gets another job in 2021 at age 63 for $ 70,000 per year, where he continues to work until his full retirement age of 66 and 8 months. He receives his retirement pension from 62 to 63, then the salary test effectively suspends his benefit at 63, when he starts working again. He voluntarily suspends his benefits at full retirement age, drawing on his 401 (k) between full retirement age and 70, when he reinstates his retirement pension plus retirement credits deferred. (Note that until he reached the full retirement age of 66 and eight months, he was technically not allowed to suspend his benefits. But because he was earning too much to collect the benefits, l effect is similar to hanging them.)
By suspending his retirement benefit at full retirement age, his discretionary spending for life until age 100 will be $ 1,393,419, compared to $ 1,275,396 if he had not. not suspended his retirement benefit at full retirement age. That’s a difference of $ 118,023 he earns by voluntarily suspending his retirement benefit between full retirement age and 70 and withdrawing his 401 (k) instead.
But what if he hasn’t applied for a social security retirement pension at all until he’s 70? He would need to reduce his 401 (k) by $ 50,000 for an additional year in 2020, but his lifetime discretionary spending in this case would be higher at $ 1,473,687.
In retrospect, our 62 year old man would have done his best financially by taking out his 401 (k) instead of claiming Social Security now. But since he didn’t know if he would find this new job, he was reluctant to dip into his savings. He was able to minimize the damage caused by an early social security claim, successfully seeking employment after the economy recovered. Bottom line: Applying for Social Security early can be a costly decision, but it’s not an irrevocable decision.