Pandemic prompts some to rethink Social Security claiming strategy

The coronavirus pandemic and its fallout on the stock market and economy are prompting some clients and their advisers to rethink their Social Security claiming strategies.

“I have a client who retired young and is taking income from her investments,” Marlene Badai, an independent financial adviser with RoZel Financial in Washington, N.J., wrote to me in an email last week. “Although a portion of her assets are protected in guaranteed annuities for income later in life, her income needs are bleeding her investments in the current environment.”

Badai asked whether her client should claim her Social Security now at age 64, with the possibility she might be able to take advantage of a do-over option if her situation improves in the future.

I have always said that Social Security claiming strategies were a luxury for people who were healthy enough and wealthy enough to afford delaying their benefits until those benefits were worth more, either because the individuals were working and didn’t need current income or because they could afford to tap their savings as a way of buying themselves a bigger Social Security benefit in the future.

The idea of earning 8% per year in delayed retirement credits for every year one postpones claiming benefits beyond full retirement age up until age 70 was compelling when other risk-free alternatives, such as interest on bank deposits, were paying less than 1% and stock market investments were going gangbusters.

It is still a valid strategy for those who can afford to wait. But recent retirees relying on drawing down their nest egg for income face a real sequence-of-return risk if their investments decline for a prolonged period during their initial years of retirement. For some retirees, claiming Social Security earlier than they had planned can be a lifeline.

Because Badai’s client does not have earned income from a job, claiming Social Security before her full retirement age of 66 and 4 months is a relatively straightforward decision. At 64, her benefits would be worth 84.4% of her full retirement age amount. While Social Security offices are closed to the public during the pandemic, the client can easily file for benefits online.

The client would have two do-over opportunities. She would have 12 months to change her mind, regardless of age, to file Form 521 to withdraw her application for benefits and repay any benefits she had received so she can restart Social Security later at a higher amount. However, I doubt that a client who is strapped for cash now would be inclined to repay her benefits in a lump sum.

Her other alternative is wait until her full retirement age or later to suspend her benefits. She would not have to repay any benefits she had received but her benefits would stop during the suspension. In the meantime, her reduced benefit would accrue delayed retirement credits of 0.66% per month up until age 70. For example, if she collected 84.4% of her full retirement age benefits at 64 and later suspended them at 66 and 4 months, her Social Security benefit would be worth about 108% of her full retirement age amount at 70.

In other cases, older workers who have lost their job as a result of the pandemic-induced economic shutdown may also decide to claim their Social Security benefits earlier than planned. Many of them who are at least 62 but younger than full retirement age may have already earned more than the current annual earnings limit of $18,240 that would normally reduce their benefits.  But there is a special “first year in retirement rule” that allows them to receive full Social Security benefits if their monthly earned income from a job doesn’t exceed $1,520 ($18,240/12) in 2020.

There is a higher earnings limit for people who turn 66 this year. They can earn up to $48,600 in the months before their birthday without losing any benefits. The earnings cap disappears at full retirement age, meaning people can continue to work and collect Social Security without losing any benefits.

Ric Edelman, founder of Edelman Financial Engines, is urging Congress to relax Social Security claiming rules during the economic crisis by allowing people who claimed reduced Social Security benefits early to choose to stop receiving benefits when the COVID-19 crisis ends, regardless of their age at the time.

“When people know they have the freedom to stop their benefits, they’ll be more likely to access Social Security during the crisis,” Edelman said in a statement. “This will make it easier for households headed by someone 62 or older to manage the crisis without creating any long-term adverse economic impact to themselves while making it easier for the government to target financial support to other households who are also in great need.”