Fears over market drop could cause some to postpone retirement

It was a small survey by national polling standards, but a significant one.

A random online survey of 380 Americans ages 55 to 60 conducted last week found that recent stock market volatility had not yet rattled Americans close to retirement age, with 96% of respondents saying that it has not affected their retirement plans.

But the survey also found that another 10% drop in the market would have a profound impact on the way that near-retirees view retirement and the economy at large, according to SimplyWise, a new online site providing retirement planning advice for consumers. Four in 10 respondents said they would delay their retirement if the market dropped another 10%.

The survey was conducted during the first week of March, before the S&P 500 index plunged more than 7% Monday in the stock market’s worst performance since the financial crisis.  

Of those survey respondents who said they would stay in the workforce longer, more than one in three said it would be for at least five years. On average, those putting off retirement said they would work an additional 4.9 years.

Older people are already working at record levels, with more than 10.3 million people age 65 and older in the workforce, according to the U.S. Bureau of Labor Statistics. Separately, a poll from the Associated Press-NORC Center for Public Affairs Research found that 23% of workers said they don’t expect to ever stop working.

Working longer can be a good solution to prevent a shrinking nest egg from being tapped too soon, allowing investments to recover and extending the life of a retirement portfolio. Working longer also allows workers to save more for retirement and reduce the number of years they are dependent on withdrawals from those savings.

But working longer isn’t the only adjustment that Americans said they would contemplate in response to a more prolonged stock market rout.

About a quarter of those surveyed by SimplyWise said they would consider claiming Social Security benefits earlier than they had originally planned in response to a severe market downturn. And that could be a costly mistake.

About one-third of Americans already claim Social Security at the earliest possible age of 62, permanently reducing their monthly retirement benefits and curtailing potential survivor benefits in the case of some married couples.

The decision on when to claim Social Security benefits is based on several factors, including the year you were born, your marital status, your health and your overall finances. People who were born between 1943 and 1954 have a full retirement age of 66. Claiming benefits at the earliest age of 62 reduces their benefits by 25%.

The full retirement age increases by two months for every birth year between 1955 and 1960, which means a decision to claim early would result in an even larger reduction in benefits for those with a higher full retirement age. For example, someone who was born in 1960 or later can still claim Social Security retirement benefits as early as age 62, but their benefits would be cut by 30%.

In addition, people who claim Social Security before their full retirement age and who continue to work are subject to earnings restrictions. In 2020, if you are under full retirement age for the entire year and you earn more than $18,240, you would forfeit $1 in Social Security benefits for every $2 earned over that limit.

In the year you reach full retirement age, there is a more generous earnings test. You can earn up to $48,600 in 2020 in the months before your 66th birthday and you would forfeit just $1 in benefits for every $3 over that limit. Once you reach full retirement age, the earnings cap disappears, so you can earn as much as you like without reducing your Social Security benefits. And, any benefits forfeited due to excess earnings would be restored in the form of larger monthly benefits.

For those people who are willing to delay claiming Social Security benefits until age 70, there is a huge bonus. They earn an extra 8% per year for every year they postpone claiming benefits beyond their full retirement age up to age 70. But it makes no sense to delay claiming beyond age 70 as the delayed retirement credits end.

Individuals with a full retirement age of 66 can increase their monthly benefits by 32% for the rest of their lives by waiting until they're 70 to claim Social Security. As a more dramatic illustration of the value of waiting, the difference between collecting reduced benefits at age 62 versus maximum benefits at age 70 can mean a 76% increase in benefits for the rest of your life.

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