3 Social Security moves that could cost you during the COVID-19 pandemic
Explore your choices before rushing to file for Social Security so you don't regret it after the fact
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.
Right now, millions of Americans are facing some tough financial choices as the COVID-19 outbreak rages on. Some are postponing retirement. Others are retiring early.
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If you're older and eligible for Social Security, you may decide to rely on those benefits to help you get through the current crisis. But be sure to think the following moves through before moving forward with them.
1. Filing early when you're eligible for unemployment
You're entitled to your full monthly Social Security benefit, based on your wage history, once you reach full retirement age, which is either 66, 67, or somewhere in between, depending on your year of birth. That said, you're allowed to claim benefits as early as 62, albeit at a reduced rate.
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If you're out of work during the pandemic, you may be thinking of filing for Social Security to tide yourself over financially, even if that means reducing your monthly benefit for life. But before you rush to do that, it pays to see if you're eligible for unemployment benefits and what those benefits look like.
Generally speaking, your weekly benefit may be enough to replace around 50% of your former wages. And right now, lawmakers are working on a second COVID-19 relief package that may boost weekly unemployment further. Therefore, it makes sense to figure out what unemployment income you're entitled to before slashing your Social Security benefit on what will likely be a permanent basis.
2. Filing early thinking you'll undo it after the fact
Though claiming Social Security early will generally result in a lifelong reduction to your monthly benefit, there's a way around that -- you can undo your filing within a year, repay all of the money in benefits you received, and file again at a later point in time to secure a higher monthly benefit. It's a strategy you might think to employ during the current crisis. If you're out of work or have taken a hit to your income, you may be inclined to claim Social Security and use your benefits as a loan of sorts that you'll pay back within the year.
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But what if the economic crisis at hand lasts longer than a year, and your personal income situation doesn't improve by the time those 12 months are up? At that point, you'll be stuck with a lower monthly benefit for life.
With COVID-19 cases surging throughout the country, we can't discount the possibility of additional lockdown measures that will set the economy back even more. As such, you may want to explore a loan outside of Social Security to avoid what could end up being a permanent reduction in your monthly benefits. Borrowing against the equity you have in your home, for example, may be a reasonable solution in this regard.
3. Filing early when you're still working part-time
Though tens of millions of Americans have lost their jobs completely in the wake of COVID-19, you may be in a situation where you're still working part-time. If that's the case, you should know that you're allowed to claim Social Security while you're also collecting a paycheck. But if you haven't yet reached full retirement age, you'll risk having a portion of your Social Security benefits withheld if your earnings exceed $18,240 this year. The only exception is if you'll be reaching full retirement age in 2020, in which case you can earn up to $48,600 this year without having it impact your benefits.
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Remember, when you claim Social Security early, you automatically reduce your monthly benefit in the process. If you need money and that's your best source for it, then filing early makes sense. But to file early, slash your benefit, and lose a bunch of that Social Security income due to earnings that are too high makes a lot less sense -- so run the numbers before rushing to file if you're still working in some capacity.
At a time when the entire country is grappling with a pandemic, you may be desperate for financial relief. And in some cases, it could make sense for that relief to come in the form of Social Security benefits, even if it means claiming them early. But before you make any moves in that regard, see what other options you have. In addition to boosted unemployment, you may be in line for a second stimulus check (lawmakers have already said that they're looking to include one in the next relief package). Or, you may have ways to borrow affordably to tide yourself over for the time being. Explore your choices before rushing to file for Social Security so you don't regret it after the fact.