Making a tough choice? Carefully investigate your options.
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Many older workers are in a jam these days, having been furloughed or laid off due to the economic turmoil caused by the COVID-19 pandemic. Relief payments and unemployment checks might help some people. But many older workers need additional help to make ends meet, and they’re looking for extra sources of cash.
In this case, it’s tempting to investigate two readily accessible sources of cash: Social Security benefits or retirement savings that are in IRAs or 401(k) accounts. But which choice is best from a financial perspective?
The first answer is neither, if you can possibly help it. Most U.S. workers in their early to mid 60s have modest retirement resources, as shown by recent research from the Stanford Center on Longevity. They need to do whatever’s feasible to make it last as long as possible.
Older workers will benefit significantly if they can delay starting Social Security benefits and avoid drawing down retirement savings for as long as possible. A smart first step is to exhaust all other sources of help, such as programs that allow you to delay mortgage and other loan payments, programs that let you pause utility or insurance bills, and help from food banks.
Many people, however, may have already investigated these sources of help and still come up short. In this case, the clear choice from a financial perspective is to withdraw money from retirement savings and not start Social Security benefits if you can possibly help it.
In normal circumstances, using money from your savings to pay yourself a monthly Social Security bridge payment is one of the best uses of your funds. This strategy uses your retirement savings to temporarily replace Social Security benefits until you start receiving your actual Social Security benefits.
The financial advantage of a Social Security bridge payment is also a smart move during these uncertain times. But there’s another important advantage to withdrawing from savings compared to starting Social Security benefits: If your circumstances improve and you’re reemployed or find other sources of income, you can easily stop withdrawing from your retirement savings.
On the other hand, it’s more complicated to try to stop your Social Security benefits if you no longer need them. It is possible to take advantage of a “do-over” within 12 months of starting Social Security benefits, technically called a “withdrawal of application.” In this case, you have to repay all the benefits you received, and Social Security will then treat you as if you never started your benefits. However, it might be tough to come up with the repayment if you spent that money to make ends meet. Furthermore, you can only take advantage of the “do-over” once in your lifetime and within 12 months of starting.
If you’ve reached your full retirement age (currently age 66 for people born in 1954 or earlier), you aren’t eligible for the “do-over.” However, you can suspend benefits and not be forced to repay any that you’ve already received. In this instance, you’ll also earn “delayed retirement credits” for every month you suspend taking benefits, which will increase your eventual Social Security benefit once you restart benefits.
Losing income from work is tough at any age, but particularly for people approaching their retirement. It’s worth your time to get the facts about your situation and develop a solid plan that helps ease your anxiety.