For those between the ages of 62 and 70, you have the opportunity to begin claiming your Social Security benefits, whether you were planning to or not. This “safety net” of sorts could be an appealing opportunity to replace the income you may have lost due to an unexpected event, but this is a decision that shouldn’t be taken lightly.
Review the considerations below, and talk to your financial advisor to determine which may be the right option for you if you've recently experienced an unexpected loss of income or sudden financial obligation.
Considerations to Make Before Taking Social Security
If you weren’t already planning on claiming your Social Security benefits soon, then take the time to review your other options first. While you’re eligible to begin receiving benefits at age 62, every year you wait until age 70, your benefits will increase. While it’s tempting to take the money now, you could be missing out on thousands of dollars in future Social Security benefits.
If you’ve been saving diligently for retirement, you may already have the funds tucked away to get you through the foreseeable future. Review your 401(k) and IRA accounts, and remember to account for income through any pension plans you may have through work. After taking stock of these accounts and any emergency funds you have saved away, you may determine that claiming Social Security benefits early is not necessary. Even putting off claiming your benefits by six months or a year could make a considerable difference in your future benefits.
It’s also important to consider that if you’re earning less now than you were in previous years, you’ll likely be in a lower tax bracket come tax season. This would make now an advantageous time to tap into your retirement savings accounts, as your tax obligation on this income may be lower than if you had worked full-time in a normal year otherwise.
Depending on the circumstances, you may be eligible to receive unemployment benefits. This is designed to be a temporary benefit to help cover necessary expenses during times in which you are not working, typically due to a layoff. Eligibility requirements and benefit amounts will differ by state, so check with your local offices to learn more and apply. It's important to note that unemployment benefits are considered taxable income. But, depending on your needs, this could be a short-term, sufficient alternative to address your financial needs.
It may be necessary to begin claiming Social Security benefits early if you’ve exhausted other resources, or you don’t have much savings to begin with. If your only other alternative, for example, is to rack up high-interest debt, taking the Social Security benefits early is almost always going to be the preferred choice. Falling into a deep hole of debt is not an easy position to overcome, and it’s not an ideal way to start your retirement.
Important Notes about Taking Social Security Early
If you do choose to take Social Security early to help ease the financial burden of losing your job, there are a few important things to remember.
Your benefits are reduced for each month prior to your full retirement. Thus, the farther your age is from your full retirement age (FRA), the higher the rate of reduction will be.
Factors like the FRA and rate by which your benefits are decreased, are dependent on the year you were born. This was brought about by the 1983 Social Security Amendments which effected the normal retirement age’s gradual increase from 65 to 67 years old within a span of 22 years, due to people living longer and becoming healthier during old age.
Check out the Social Security Administration’s (SSA) Retirement Age Calculator for a detailed breakdown of how your benefits may be reduced at a particular age.
In contrast, delayed retirement increases your social security benefits. The rate is graduated depending on the number of months between your FRA and your age upon claiming, which ranges from 100.7% to 132% at age 70 or later.
Taking your social security early would not only reduce your monthly benefit, but also what you might get as a result of future cost-of-living adjustments (COLA) – an increase made on social security to thwart the effects of inflation.
What happens if you begin claiming Social Security, but you get your job back? If you begin working again or find a new job, you may be subject to having a portion of your benefits withheld. This would be based on how much you are making above the SSA’s exempt limit. The SSA uses a retirement earnings test to help determine this amount.
You could choose to withdraw your application for benefits within 12 months of becoming entitled to retirement benefits. For example, say you’ve chosen to take benefits now because you were furloughed or laid off. A few months from now, your financial situation has turned around and you’re earning again. With some careful consideration, you could choose to withdraw your application.
This would mean you’d stop receiving Social Security payments, and it’d essentially “reset” them. Any future date you choose to begin receiving them again, that would be the date that determines how much you receive. If you choose this route, however, it’s important to note that you would be required to pay back any benefits you had already received.
While claiming Social Security benefits now to address your sudden loss of income may be tempting, it’s important to take some time and consider all of your options. It may be the best move for some, but others could be robbing their future retirement without a need to. If you find yourself in this difficult position, work with your financial advisor to find the right option for you and your spouse.
You can lean on MBE Wealth’s financial advisors and planners to help you go through your options and devise a personalized plan that will help you reach your short-term and long-term goals. Talk out to us today!
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