The light at the end of the COVID-19 tunnel may be drawing nearer and getting brighter as the CDC lifts restrictions and life resumes some semblance of normalcy; but, the long effects of this virus are far from over. As we see it now, the coronavirus-induced economic contraction of 2020 could cause a sharp decline in Social Security benefits for many US workers, especially for those who planned to begin claiming in 2022.
The Impact on Payouts Isn’t Positive
The first snag is in the calculation. Social Security uses your lifetime monthly income average, calculated from your 35 highest-earning years, as the basis for your benefit calculation. But, before final calculations are made, and to accommodate for economic changes, your earnings are adjusted next to the National Average Wage Index two years before your retirement.
For individuals retiring in 2021, adjustments will be made with the average wage index from 2019. For individuals retiring in 2022, then, adjustments will be made based on the numbers from 2020. Yikes! Because the average income fell dramatically in 2020, those set to collect benefits in 2022 will see a lifelong reduction in benefits as compared to previous years.
Just how much could this affect the lifetime benefit? It is yet to be seen, but Stephen Goss, the Social Security Administration’s chief actuary, estimated in July that its decline would result in a 9% drop in payments for affected beneficiaries. That’s a significant reduction to expect so close to your retirement date.
But, that’s not all. We must also consider the impact that unemployment and/or a reduced earning capacity have on payouts. Of course, for some, a reduced earning year may only make a fractional difference. But, for those who have fewer than thirty-five earning years from which the Social Security has to base their benefit, another “zero” could deal benefit calculations a hard blow.
Consider Delaying Benefits
If you were planning to begin collecting in 2022, or are an individual whose benefit stands to be negatively impacted due to unemployment or reduced earnings, this may be the time to consider delaying your claim. While you’re eligible to begin receiving benefits at 62, putting in a few extra years could result in a significant increase in your lifetime benefit.
Rely on Other Income Sources to Bridge the Gap
If you’ve been diligently saving and preparing for retirement, it’s likely you have funds tucked away in other retirement savings vehicles or brokerage accounts that can help you get through the next few years. And if you earned less in 2020 than in previous years (or anticipate earning in future years), now may be the best time to tap into those taxable or tax-deferred retirement accounts as you may find yourself in a lower tax bracket with a lower tax liability.
Withdrawing Your Application to Receive Social Security
Many individuals who were furloughed or laid off during the pandemic decided to begin claiming social security to replace lost income from their jobs. But, a few months later, found gainful employment or regretted making this decision in haste. Luckily, individuals have 12 months to withdraw an application for benefits before they are locked in. Doing so stops the current social security payments and “resets” them for the future. The new claim date will then determine the benefit that is received.
Please note, though, that any benefits received will have to be paid back upon withdrawal of the application and anyone else who receives benefits based on your application must also consent in writing to the withdrawal.
If you cannot withdraw your application and you have reached your full retirement age but are not yet 70, you can ask to suspend benefit payments. In this case, you will earn delayed retirement credits for each month your benefits are suspended which results in a higher benefit payment to you.
Look at the Big Picture
Factoring social security into your retirement plan can be complex as there are a handful of interrelated factors at play that determine your benefit—factors that have been further complicated by the reverberations emanating from the pandemic. As you consider your next steps, it’s critical to keep a big-picture view in mind, since the decisions you make now can affect your lifelong benefit amount. You’ll want to weigh the relative merits of each option as they pertain to your overall retirement plan and tax strategy now and in the future.
At Uncommon Cents Investing, we understand that Social Security likely won’t comprise the base of your income in retirement, but we know that you’ll want to get as much from this supplement as you can (after all, you’ve been paying into it your entire working life). We specialize in working with individuals and families nearing or in retirement to generate a predictable and comfortable income from their resources so they can enjoy all the perks that retirement has to offer. If you or a loved one need some assistance getting your plan in order, we encourage you to schedule a call with us. In our introductory phone call, we can answer some of your most pressing financial questions and learn more about your situation.