While we are all stuck at home during the Coronavirus pandemic, you may be concerned about the security of your retirement nest egg. Working from home, you might be tempted to check your 401(k) balance online continually. Recent dips in the stock market may lead you to reconsider the optimal time to claim Social Security.
You may ask, “When is the best time to claim Social Security?” In most cases, if you want to claim the biggest benefit, you should start receiving Social Security benefits as late as possible. With this knowledge in hand, 62 is still the most common age when people begin claiming their Social Security benefits. In case you were wondering, 62 is the earliest age at which you can claim social security retirement benefits.
Given the recent drop in the stock market, led by the panic around COVID-19, should people reconsider delaying Social Security benefits? Claiming Social Security at an older age could give you time for your investment to bounce back. You should ask, is the risk versus the reward worth it here?
As a financial planner, I am a massive fan of maximizing the retirement income my clients can get from Social Security. With that in mind, not all clients should wait until they are 70 to claim Social Security benefits. The 8% annual increase in Social Security benefits you get each year you wait, past full retirement age, is a guaranteed return. No stock market risk needed. While it is relatively common to see returns well above 8% in a well-diversified retirement account, it is not guaranteed you will earn 8%. You would have a tough time beating an 8% return investing in a conservative portfolio, most holding cash or bonds.
Ideally, you will have a combination of retirement accounts, investment accounts, and Social Security to generate a nice income in retirement. Your retirement accounts can be more beneficial when the market rebounds. They will also offer more withdrawal flexibility than you will have with the fixed income from Social Security. While I anticipate that the stock markets will rebound nicely, it is just a matter of when and how much.
If possible, even with the Coronavirus looming, you should consider delaying Social Security as long as possible. This is even more important for those who expect to live longer and who are in good health. If you are a 400-pound chain smoker, who has never eaten a vegetable, you may want to claim at 62. On the other hand, if you are a healthy 62-year-old and your parents (and maybe even grandparents) are still alive, well, you probably will be happy you waited to claim Social Security.
When to claim Social Security is a big decision. Your financial planner is there to help guide you to the plan that will optimize the value of your Social Security benefits based on your health, assets, and financial needs. It is expected that COVID-19 will threaten the solvency of Social Security; it doesn’t need to damage your financial security.
Social Security Income is Guaranteed for Life
Social Security benefits are an income stream you can’t outlive. Your benefits won’t go up or down based on the movement of the stock market. Inflation will play a role in your cost of living adjustment (COLA) over time, and unless something miraculous happens this year, the COLA for 2021 will be small.
Social Security will provide a substantial portion of the retirement income for millions of Americans. The average Social Security benefit is just over $1,500 per month in 2020. Assuming a 4% withdrawal rate, you would need roughly $450,000 in investable assets to generate this level of income. The number would likely be larger if you take into account the lower taxes you will pay on Social Security benefits, depending on your overall income in retirement.
It is shocking to me that more than half of Americans have nothing saved for retirement. Having saved zero dollars for retirement is entirely unrelated to the Coronavirus. The number of people who don’t have enough money saved to maintain their standard of living in retirement is likely pushing 80% or more. Think of it this way, if you can’t find money to save for retirement, how are you going to live comfortably on 30, 40, or 50% of your pre-retirement income? In case you were wondering, it isn’t just lower-income people who don’t have anything saved. I have run into plenty of people making a million or millions per year, with little or nothing to show for it. Picture the person with a leased Bentley; the house often rented or has a second or third mortgage.
The value of the Social Security safety net is highlighted when we face challenges like Coronavirus. Social Security benefits may not go up when the stock market rallies, but they also don’t go down when the stock market hits a rough patch. It is also a forced saving plan (you pay into Social Security) that people can’t raid when they need money. The CARES act made it easier for people to pillage their 401(k)s if they are affected by COVID-19. As of now, they can’t raid their future Social Security benefits. That being said, Donald Trump (considered by some to be the king of debt or bankruptcy, depending on who you ask) is proposing a way for people to get some of their Social Security benefits now. What could go wrong?
What is The Maximum Social Security Benefit?
To put all of this in perspective, I want to share the maximum Social Security benefits you could receive in 2020. For those who file for Social Security in 2020, the maximum amount you could receive at age 62 is just $2,265 per month.
For those who are able to be a bit more patient and wait until the age of 70, the maximum Social Security benefit is $3,790 per month in 2020. While these numbers look big, you will likely have been earning an annual salary far more than $130,000 for quite some time in order to qualify for the maximum Social Security benefit.
Even with the absolute maximum Social Security check each month, taken at the last moment possible, you will want to have other sources of retirement income. Whether you are counting the days until you reach financial independence or are decades away from retirement, you can still benefit from developing a plan to improve your financial security now. With a comprehensive plan, it will be easier to weather the future stock market downturns that tend to happen every few years and stay the course to your dream retirement. If nothing else, contribute to a retirement account for the current tax savings.