The lines for filing for unemployment run down city blocks, and job prospects are few and far between. But if you’re a newly jobless woman nearing retirement age, the situation looks especially bleak.
Retirement funds have lost a significant percentage of their value, leaving women in the latter years of their careers wondering how best to make up for lost income.
Filing for Social Security benefits a few years early may seem like a good lifeline, especially if you’re age 62 to 66, which is just a few years away from full retirement age in the eyes of Uncle Sam. But be careful: This is one of the most critical financial decisions of your life.
Six things to consider before filing early for Social Security
What you decide to do in your early 60s will impact your retirement security for decades. We’re talking about having a lot less income in your 80s, 90s, and even your 100th birthday.
- You could sacrifice up to 30% per month in income if you claim at age 62. Is it worth it to claim early if you are going to lock in permanently reduced income for your entire retirement? The decision to claim early is often regretted by women in their 80s and 90s.
- You need 35 years of work to get the best benefit amounts. Social Security uses your highest 35 years of earnings to calculate your benefit. You want as many high-earnings years as possible, and they often come later in your career. Check your Social Security statement to see your work history and estimated benefit amounts. (Use www.SSA.gov as your go-to resource.) You can see how much filing for Social Security benefits early will cost you.
- You can make up for career gaps. Many women move in and out of the paid workforce during their careers to raise children or care for loved ones. And, now, you may have temporarily lost your job due to the coronavirus. As mentioned above, Social Security uses your highest 35 years of salaries, however, those 35 work years do not have to be consecutive years to count.
- You’ll get more money if you can wait to claim after your “Full Retirement Age.” The Full Retirement Age (FRA) is the age at which you qualify for the optimal Social Security monthly payment. If you’re born in 1955 or later, your FRA is between 66 and 67. However, if you can wait longer to claim your benefit, you qualify for a higher payment — up to 8% per year more. A bigger check can make your 80s and 90s more financially comfortable.
- If you get rehired, benefits may be withheld. You can collect Social Security and work at the same time. However, if you earn too much (called the Earnings Limit Test), your monthly Social Security payments can stop. For example, in 2020 those who started collecting Social Security early and earn more than $18,240 through work will have some or all of your benefit payments withheld until you reach your Full Retirement Age.
- It’s challenging to undo an early claim. There are only two ways to undo an early claim. And they are generally too costly for most women.
- One option is the “do-over.” It must be done within the first 12 months of receiving benefits. You ask Social Security to stop payments and you must pay back 100% of the money you’ve received. Later, generally at FRA or later, you file for benefits as if you never made that early claim.
- The other option is to suspend your reduced benefit payments when you reach your Full Retirement Age. The idea here is that you put your payments on hold for an additional one to three years. The lower payment amount will be increased up to 8% per year up until age 70. Then, you restart payments at age 70 at a significantly higher monthly payment than you were receiving when you claimed early.
You have other options
At a time like this, recognize that sometimes life can get pretty messy. Take a deep breath and look at all of your other financial resources before making any decisions about when to file for Social Security.
Keep in mind, this Coronavirus situation is not like any other crisis we’ve experienced. Federal government economic packages and your state governments have stepped in with more options than ever before to help those who have lost incomes. Some things to consider:
- Unemployment has been increased and extended. Plus employers are strongly encouraged to bring the workers back as soon as possible.
- Most individuals will receive a stimulus check, up to $1,200, from the Federal government to help keep people afloat.
- You may qualify for personal loans or lines of credit to tide you over while you wait for the market to improve and employment opportunities to emerge.
- If you have to borrow or take a hardship withdrawal from your workplace retirement account, the new rules of retirement withdrawals do away with early withdrawal penalties, help mitigate or completely eliminate taxes and let you access up to 100% of your savings. And, as always, you can tap into your Roth IRA contributions at any time without paying any penalties or taxes.
The bottom line: Do your research about Social Security and the consequences of claiming early. Use all other financial options available in the COVID-19 era, and make the best decisions you can for the near-term while keeping an eye on the long-term.
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Marcia Mantell, RMA®, NSSA®, is known for translating complex retirement rules into language we can understand. She is author of “What’s the Deal with Retirement Planning for Women?”, the newly published “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.