Tempted to claim Social Security benefits amid the market slump? Here’s what to know first

Personal Finance

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As the market hits the skids, experts are warning that you shouldn’t make rash moves with your portfolio.

And that includes one retirement income source you might turn to for safety: your Social Security benefits.

A recent survey from SimplyWise, a retirement income technology provider, found that 1 in 4 individuals would consider taking their benefits early if the stock market dropped an additional 10%.

Meanwhile, 44% said they would delay benefits and continue working if the markets faced that kind of slump.

The survey, conducted last week, included at least 300 individuals approaching retirement.

Meanwhile, stocks continued to sink on Monday, with the Dow Jones Industrial Average down 6.4% and the S&P 500 falling 6.2% amid an oil price war and ongoing coronavirus fears.

Even as you see your 401(k) and other retirement investments decline, you should pause before you start drawing on your Social Security benefits earlier than you originally planned.

“Long term, it’s better if possible to wait,” said Heather Schreiber, founder of HLS Retirement Consulting.  

That’s because if you start taking retirement benefits at age 62, the earliest date at which you can claim, you will take a permanently reduced benefit.

Only at full retirement age — generally 66 or 67, depending on the year you were born — do you receive 100% of the benefits you have earned. And if you wait until age 70, you can boost your benefits by up to 8% per year.

So if you are thinking of revisiting when to claim your benefits, here are a few things to consider.

Review your retirement plan

Ideally, you should already have a plan on how you’re going to get your retirement cash while you delay Social Security benefits, said Joe Elsasser, president and CEO of Covisum, a Social Security claiming software company.

Last week’s stock market activity should just be a “blip on the radar” that happens every couple of years, Elsasser said. However, many investors may have forgotten that because the gains have been so smooth.

“We have no idea how this is going to pan out,” Elsasser said. “And that’s why this should be less of a Social Security question and more of a financial planning question.”

If you’re still working, it might not pay to take benefits early, Schreiber said. That’s because if you are younger than your full retirement age, your benefits will be reduced by $1 for every $2 you earn up to $18,240, the annual limit for 2020.

If you are married, it’s also important to consider how your claiming decision affects your spouse, .

If you’re the higher-earning member of that couple, it does not pay to claim early, Elsasser said, because that would reduce your partner’s spousal and survivor benefits.

On the flip side, having the lower-earning member of the couple claim early is “an easy decision to say yes to,” Elsasser said.

Where to go for emergency funding

In addition, there are other sources of money you should consider before tapping Social Security.

First, take cash from an emergency fund, if you have one, Elsasser recommended. Then consider taking from the bond side of your portfolio and cut personal spending.

“Only after you’ve explored those would I consider claiming Social Security early,” Elsasser said.

One emergency circumstance in which it can make sense to start retirement benefits earlier is if that’s your only choice aside from withdrawing money from a retirement account that is down, Schreiber said.

“If someone is super close and their only choice is to file for Social Security benefits or pull out from a retirement account that has lost money or is on the downturn, I would say filing for Social Security to preserve, not amplify the loss on the retirement savings would be the way to go,” Schreiber said.

How to reverse a claiming decision

The good news is that if you have already hit the panic button and are claiming your benefits early, you can undo your decision.

But be aware that you only have 12 months for a do-over. And you can only reverse your claiming decision once in your lifetime.

One big catch: You will have to repay any benefits you received during that time. And that includes money that has gone to your spouse and dependents. This payback rule does not apply to divorced spouses who may be claiming benefits on your record.

Consider a voluntary suspension

If you still feel you have to take Social Security benefits early, you may also want to consider revisiting your decision once you do reach full retirement age.

At that point, you can use a strategy called voluntary suspension.

By doing that, you stop receiving benefits, which will give you delayed retirement credits. For every 12 months you stop getting checks, you can earn an 8% delayed retirement credit.

That applies up until age 70, at which point your benefit payments will automatically restart, but with bigger checks than you were previously receiving. Keep in mind that suspending your benefits will also mean others who are receiving checks based on your record will stop getting that money.

Voluntarily suspending benefits does not require you to pay back any benefits you previously received.

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