Why You Shouldn't Panic If You Have to Claim Social Security Early Due to the Coronavirus

The coronavirus crisis has caused millions of Americans to lose their jobs, and the resulting economic fallout has caused turmoil in the stock market.

If you're suddenly unemployed and are near retirement, you may believe you have few options left but to claim Social Security after your unemployment runs out. And if you're already retired and are living on your investments, you may want to leave your money in the market to recover losses, another reason to contemplate claiming early.

Before you decide to start your benefits, you need to know that claiming them before your full retirement age (between 66 and 67 depending on birth year) could lead to a significant reduction in your checks due to early-filing penalties. And if you file before you reach age 70, you'll lose the chance to raise your monthly benefit before maxing out on delayed retirement credits.

Often, it's best to wait as long as you can, to get larger checks for the rest of your life. But if you're looking at financial struggles and need the money, claiming early isn't necessarily a reason to panic. Here's why:

Why You Shouldn't Panic If You Have to Claim Social Security Early Due to the Coronavirus
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The reduction in your lifetime benefits may not be that big

If you claim Social Security benefits early, you'll see smaller checks for the rest of your life. In fact, they could be a lot smaller. Claiming at 62 with a full retirement age of 66 reduces your benefits by 25%. But that doesn't necessarily mean getting less lifetime income. Although your checks won't be as big, you'll get more of them.

In fact, early-filing penalties and delayed-filing credits are an attempt to equalize lifetime benefits received. Based on estimates of how long people live, penalties and credits raise or lower the amount of checks relative to full retirement age, so your total payout should theoretically be the same no matter when you file.

Of course, there's a chance you could outlive your projected life expectancy. If you do, you'd receive your higher monthly checks longer than expected -- and longer than you'd need to break even for the years of income missed by not starting your benefits ASAP. It's this bonus money you miss out on if you have to file early.

Depending on when you file for benefits, it could take about 10 to 14 years before you see an increase in the amount you collect over your lifetime as a result of delaying your claim. There's no guarantee you'll live long enough. And if you do, you have to live a lot of extra years before the extra money in your checks adds up to a meaningful amount.

You also have an option that won't hurt the size of your checks at all

As life expectancies get longer and healthcare costs rise late in life, you still may be reluctant to claim benefits early and consign yourself to smaller checks. If that's the case, there's one possible option to access benefits now but not affect your checks for the long term.

You can do this if you claim your benefits and then rescind the filing within 12 months. But there's a catch: You'd have to pay back all the benefits when you undo your claim.

This is a high-risk strategy because it relies on having access to funds to pay back all the money you received. If you're forced to claim benefits to cover bills, you may not have the money by the end of the year, and you'd be stuck with the smaller checks for life.

Still, if you think your financial situation will rapidly improve, this option is available.

Should you claim Social Security benefits early?

Making the choice to file for Social Security early due to the coronavirus crisis is a big decision. You have to think about the downsides of reducing the size of your checks instead of maximizing this source of lifetime income.

At the same time, you don't want to doom yourself to years of struggle if you need the money now, and you may not want to sell losing investments and reduce your retirement accounts to a dangerously low level just to get larger Social Security checks in the future. So if you need the benefits now, try not to stress too much about doing what you must during an unprecedented economic and public-health crisis.