The market downturn caused by COVID-19 is enough for some retirees and senior workers to hasten their claiming of Social Security. However, doing so too early comes with repercussions.
According to the Center for Retirement Research at Boston College, Social Security claims are filed more often during market downturns. Research conducted after the 2001 stock market crash and the 2008 Great Recession shows Baby Boomers often turned to Social Security claims as a source of needed income. Case in point, in 2009, 42.4% of 62-year-olds had claimed Social Security, up from 37.6% in 2008.
Because Social Security is viewed as a sort of lifetime guaranteed income, workers and retirees depend on this ready source of cash to fund emergencies like those many people faced during the Great Recession.
“People are going to need a consistent income source, especially with companies furloughing and laying off employees,” explains Matt Rutledge, a research fellow at the Center for Retirement Research at Boston College. “Even for those facing a temporary layoff, people are saying they need the money from somewhere.”
Of course, it is standard advice that people should do their best to delay tapping into Social Security until their full retirement age (FRA), when they can receive 100% of their earned benefits. FRA depends on a worker’s year of birth, but typically falls at age 66 or 67. Claiming ahead of this window leads to an automatic reduction, and those who file at the earliest age of 62 run the risk of receiving the highest cut—up to 30%.
“This adjustment that people get for taking Social Security benefits later is more valuable than ever,” says Dave Evans, senior director at Team & Total Insurance Solutions. “That’s the paradox for these retirees—that their Social Security benefits are so valuable, but even more so if they defer them.”
Ideally, these individuals would have access to other sources of income such as emergency savings accounts or, if a worker was laid off, unemployment insurance. In regard to the latter, workers can file for the two benefits simultaneously without affecting the Social Security earnings limit—which for those under the FRA, runs up to $18,240 a year.
Also notable, as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act relief package, workers who were furloughed or laid off are entitled to an additional $600 a week in unemployment insurance until July 31. Depending on what a worker’s bills and necessities look like, they may not have to tap into Social Security.
Workers have up to one year to withdraw their Social Security application with no interest, but can only do so once in their lifetime. Additionally, workers will have to repay all the benefits they received.
“Because an individual pays back the money, it’ll be as if they never took their benefits,” Evans explains.
However, if the individual misses the one-year window, they would have to wait until their FRA to suspend benefits. For example, a worker can file for Social Security insurance at age 62 but have a full retirement age of 66. If they want to alter their benefits and withdraw their Social Security insurance after the 12-month deadline, they would not be able to. The individual would have to wait until their FRA of 66 to suspend benefits.
Aside from Social Security and unemployment insurance, individuals can apply for 401(k) loans or withdrawals under coronavirus-related distributions, or CRDs. Among those who immediately qualify for distributions are those who have been diagnosed with COVID-19 or have a spouse or dependent who tests positive for the virus. Individuals who are having trouble paying off bills because of reduced works hours or caregiving for children, or who are business owners who have had to shut down their business, are also eligible.
While experts agree 401(k) distributions are a last resort option, they are temporary solutions for those who have exhausted all other options, Rutledge says. “It might be the ideal time for some to use a 401(k) loan, provided they pay it back,” he adds.
Before considering these options, and especially before claiming early Social Security, Evans suggests individuals run through various scenarios to understand their choices more clearly. On the Social Security Administration website, for example, workers can use the “my Social Security” feature and test their options to see if claiming the benefit early is the right option for them or if they can afford to wait a bit longer.
“For many people, their biggest asset isn’t the value of their home or their 401(k) savings,” Rutledge says. “In fact, it’s the present value of their Social Security benefits—something that could run into the millions.”