Social Security During a Pandemic: Five Factors to Consider

The American College of Financial Services
May 11, 2020

An unprecedented time calls for difficult choices.

For years, we’ve known comfortable retirement is a goal that, for many people, is getting further and further out of reach. Generous pensions for workers who devoted their lives to their companies are disappearing. Knowledge of proper retirement planning techniques among consumers is distressingly low. Only about half of Americans own any retirement accounts and are saving at all. Considering these facts, Social Security, as a guaranteed government benefit, has become the go-to solution for funding most people’s retirements.

Unexpected events, however, can turn conventional wisdom on its head. The COVID-19 pandemic upended the way we all think about financial markets and proper advising, and created a challenging new landscape for professionals to navigate. With clients’ portfolio values in free fall and current income uncertain, retirement advisors across the country say many are looking at Social Security as a way to bail themselves out. But is that really a good idea?

Let’s look at five important questions advisors and clients should discuss when thinking about claiming Social Security.

 

1. How Long Do They Have to Live?

 

It’s not a fun thing to consider, but all of us have limited time, so it’s important to make good use of it. Claiming age is one of the single most critical factors for your clients in deciding when to file for Social Security: it can be as early as 62 years old, but annual benefit amounts get higher for every year they wait until age 70. For every year a client claims before full retirement age, the potential payout could be reduced by as much as 7%, meaning retiring at 62 in 2020 would mean they’d get only around 70% of the full benefit.

This is when you and your client need to consider many factors: physical health, histories of illness, lifestyle issues, family lifespans, and more. Any one of these can make or break a decision about when clients shoot for claiming Social Security, especially with the COVID-19 pandemic in mind. While being strapped for cash right now might seem like a good reason to claim Social Security earlier, clients need to think about where they want to be down the road before deciding when is the best time to file.

 

2. What Are the Benefits if They Delay?

 

Aside from the obvious growth of Social Security payouts the longer your clients wait to claim their benefits (around 8% more for every year of delay up to age 70), there are several reasons for putting off filing for as long as possible. Benefits are adjusted annually for inflation, and with a higher guaranteed return than any other financial instrument, delaying a Social Security claim is a prime strategy for anyone who is relatively healthy and likely to live beyond the average American lifespan (currently around 79 years).

Even a delay of a couple of years can make a world of difference. According to projections, a 62-year-old with a full retirement age benefit of $1,500 would increase potential lifetime benefits by over $100,000 by waiting until that point to claim Social Security. That’s $100,000 your clients didn’t have before. However, the COVID-19 pandemic has and will continue to affect the retirement planning calculus. Knowing how quickly the stock market can dive and long-fought gains evaporate, many clients may lean toward taking Social Security earlier to ensure their transition from working life into retirement will be as painless as possible. The right answer is unique to every situation and requires careful planning and consideration.

 

3. What’s Their Family Situation Like?

 

Another factor that can have a big effect on when clients claim Social Security is their current family financial needs. The COVID-19 pandemic exposed the vulnerabilities of many economic sectors, specifically in the service and entertainment industries, and many young people are out of a job and relying on unemployment to get by. If your clients have family members in this situation, they’re going to want assets that are available to help. This includes circumstances that see one partner in a relationship laid off and relying on the salary or benefits of the other. This can be tricky to manage, especially when the couple is near retirement age.

Experts agree that in this situation, if both partners file for Social Security at the same time rather than waiting for full retirement age, they could stand to lose a lot of money. However, if one partner claims their Social Security early, and the other waits a few years until their full retirement age, they’ll end up being able to support a comfortable lifestyle for much longer. This is just one strategy to think about when working with clients through a complex family situation.

 

4. What Other Options Do They Have?

 

Outside of Social Security, many clients’ additional options to fund their retirement are limited to what savings they’ve managed to establish during their lives so far, but every little bit helps. If they’ve made it a point to use company-provided 401(k) plans or IRAs, for example, the current low-interest rate environment caused by the economic havoc of COVID-19, along with legal provisions that waive many of the usual penalties for early withdrawal, could mean those retirement accounts can offset some of the financial pressure. Additionally, the loss of earned income that could come with a layoff or a retirement from the workforce means clients could be in a lower tax bracket, offering them access to even more relief.

There’s also the option of claiming Social Security benefits now, but suspending them later to accumulate delayed retirement credits. According to the law, a person can only suspend their Social Security payouts once, but those funds won’t be lost: if the client waits until their full retirement age to start claiming them again, for example, the funds will be increased to play catch-up for the amount of time they weren’t claiming, in addition to being higher in general due to the normal Social Security rules.

It’s never an optimal situation when clients are forced to consider taking out retirement assets earlier than projected, but with some guidance and planning, there are plenty of ways you as an advisor can minimize the damage to their long-term plans and compensate for it.

 

5. Will Social Security Be Around When They Need It?

 

Unlike the previous questions, this one is much more hypothetical and subjective. We’ve all heard the rumors of Social Security’s inevitable demise from self-styled doomsayers for decades, and for the most part they’ve been greatly exaggerated. That said, current financial realities show there’s no hard guarantee Social Security benefits in the future will be what they are now—if they exist at all.

Estimates from experts differ in range, but most agree that considering the exploding numbers of retiring Baby Boomers and that generation’s longer life expectancy, Social Security will be under increasing strain in the coming years, to say nothing of the financial shock of COVID-19 on the system. Without drastic action, bankruptcy could be on the horizon as early as 2030, and the contemporary politics of benefits makes that action look ever-more unlikely.

This decision comes down to a judgment call between you and your clients. Consider when they plan on claiming their Social Security, how old they’ll be in another 10 or so years, and how much they’ll need to fund their ideal retirement. Hopefully the system’s issues will be resolved by then, but in the meantime, a dose of planning and knowledge of alternatives can make their future more secure and put their minds at ease.

 

Gain the Confidence Knowledge Provides

 

While Social Security can be a huge asset to advisors and clients looking to shore up their current and long-term financial plans, it’s also not a panic button to be pressed in the heat of the moment or a benefit to be taken for granted: careful consideration is required before choosing the optimum time to claim benefits.

In these trying times, The American College of Financial Services is here to help with the resources and expert advice you need from the profession’s top thought leaders. For more, visit our COVID-19 Resource Center.

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