Determining the right time to claim your Social Security benefits is a critical piece to your retirement puzzle.
In recent years, more Americans are choosing to wait until full retirement age or beyond to file, which can often result in a substantial increase to their lifetime benefits.
But what about now? The pandemic has presented new challenges for recently retired families, both in terms of their investments and their lifestyle plans. Should your claiming strategy change as a result of COVID-19 and its impact on the global economy?
Here are some factors you’ll want to consider when it comes to timing your social security claim. We’ll cover claiming late, claiming early, and how the coronavirus might affect this decision.
The Case for Delaying
While it may be tempting to file for benefits as soon as you’re eligible at age 62, there’s a strong case to wait. For every year you wait until age 70, your benefits will increase.
If you’re married, there’s a good chance your optimal strategy involves at least one spouse delaying filing as long as they possibly can, even if that means drawing from your retirement accounts to make up for the income you would have received.
Why should you consider dipping into your savings first instead of receiving the guaranteed monthly retirement payment you’ve earned?
Social Security is based on your earning history, and you’re only entitled to 100% of your benefit when you reach full retirement age (FRA). Depending on when you were born, your full retirement age falls somewhere between age 65 and 67. If you file earlier than your FRA, your benefit amount can be reduced as much as 6.7% annually.
It gets even better if you delay past your full retirement age. For each year you delay, you’ll receive an 8% increase to your lifetime benefit up until age 70. When you think of it in terms of your portfolio, that’s an annual return that you simply can’t find in any (legitimate) investment out there.
It’s also important to remember this is a guaranteed lifetime benefit. If you’re married, your partner will also be entitled to a spousal benefit, meaning they’ll have the ability to receive the greater of yours or theirs for the remainder of their life. That can be a meaningful difference if just one partner lives past average longevity age.
The Case for Filing Early
There are many valid reasons you may choose to take your benefits early. With fewer families receiving traditional pensions, your Social Security benefit may be the single most important source of retirement income you have.
For those with health and longevity concerns, it’s perfectly reasonable to decide to take what you can to support your lifestyle today.
What about the health of the program itself? It’s a good question, especially given the economic downturn caused by the pandemic. Even with the recent events, this alone shouldn’t be a determining factor on when to claim. The Social Security trust fund has always been a popular discussion point, but many reasonable changes can be made to extend the program without affecting your benefits.
Evaluating the Coronavirus Impact
What if you or your family has been affected by the economic slowdown?
Of course, you may now find yourself in a position where you genuinely have no other sources of retirement income to cover your living expenses. Many families are also facing the tough decision of how to support their adult children who have suddenly lost their jobs.
But for those with adequate retirement savings, having less earned income this year could actually help guide your Social Security filing decision.
One often-overlooked aspect of retirement planning is managing the taxes you pay on your pre-tax accounts. If you hold the majority of your savings in a 401(k) or traditional IRA, that means you’ll still need to pay income tax on that money before you use it. With less earned income this year, you may find yourself in a lower tax bracket, providing the opportunity to pay less tax on distributions now while your benefit continues to grow.
Making Your Choice
To review your personal statement of benefits, you can create an account on the Social Security website. The online portal will provide you with your estimated benefits for claiming at different ages, as well as list your lifetime wage history and how your benefits are determined.
Unfortunately, there is no one-size-fits-all advice when it comes to when you should file for your benefits. The decision depends on your specific situation regarding your health, marital status, savings, tax bracket, and other sources of retirement income.
If you have a financial plan and diversified portfolio in place, remember that while COVID-19 itself may not have been expected, short-term market volatility and economic uncertainty were likely already built into your projections.
Retirement planning is all about making educated decisions within the context of your overall financial picture, and choosing when to claim your Social Security is one of the biggest factors you’ll want to make sure you get right.
Need help making the best decision for you and your family? Get in touch.
Brett Koeppel is a fee-only Buffalo financial advisor, CERTIFIED FINANCIAL PLANNERTM , and the Founder/President of Eudaimonia Wealth. Eudaimonia Wealth is a fee-only, fiduciary, Buffalo financial planner and wealth management firm dedicated to helping families prepare for and transition into retirement by providing independent, objective financial planning and investment management advice.