The COVID-19 pandemic has upended our entire nation, and indeed the world. Millions of employees have lost their jobs, many businesses have gone under or are teetering on the brink, and the economy continues to be affected. As we look at what this all means for retirement plans, one bright spot in this bleak landscape is Social Security.
According to the Social Security Administration (SSA), Social Security benefits have been uninterrupted by the health crisis. In addition, you should have received full or partial Economic Impact Payments (EIPs) as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act even if you take Social Security benefits, as long as your adjusted gross income is below the Act’s limits: $99,000 for single filers and $198,000 for married filers with no dependent children. (Read our recent blog post: How the CARES Act Impacts You.)
This is not to say that Social Security will be unaffected by the pandemic, however. For example, the annual Cost Of Living Adjustment (COLA) can actually reduce your monthly payments if deflation occurs, which is possible when the economy shrinks. The 2020 COLA was 1.6 percent, but all bets are off for the 2021 figure.
Social Security may seem like a trivial detail in today’s environment, but these benefits are crucial to many people’s retirement plans.
As leaders in the financial planning industry, Global View believes that knowledge is the key to providing our clients with the most accurate and sound advice available. This is why I, along with financial advisor Joey Hines, recently achieved the designation of Registered Social Security Analyst with the National Association of Registered Social Security Analysts. Making the wrong decision on how and when to take Social Security benefits can cost a person thousands of dollars.
It is important to have an experienced financial advisor walk you through your Social Security decisions – especially in times like now.
While financial planning is about much more than just numbers, it is important to be prudent and optimize strategies, including Social Security benefits. If you have questions about these benefits, we’re ready to help.
Long-Term Impact of the Pandemic
Your Social Security benefits are determined in part by the amount of payroll taxes you pay. These taxes help fund both Social Security and Medicare. Naturally, if you aren’t working, you aren’t paying payroll taxes. This might reduce the ultimate size of your monthly Social Security benefits.
Of course, it’s important to keep an eye on Social Security to make sure it has enough funding for the long-term. As of now, the Social Security trust fund won’t be depleted until 2034, but with a huge drop in payroll taxes due to the current unemployment, that deadline could arrive sooner. Congress can shore up Social Security by appropriating tax revenues, but this may be accompanied by demands to reduce benefits.
Don’t Be Fooled by Scams
To be clear, there have been no changes to Social Security due to the pandemic. Yet this doesn’t stop bad people from trying to defraud innocent seniors.
The situation is ripe for confusion, with some fraudsters blending CARES Act payments with those from Social Security. Beware of anyone who tells you that you must do something to ensure you continue to receive your Social Security checks. You may also be subjected to false information about your Medicare coverage.
One way you can be hurt is by giving out your Social Security number. Scammers have many inventive ways of tricking you into revealing your number. For example, they may set up phony websites that supposedly help you get CARES Act payments. These sites may ask for your Social Security number, bank account number and other private data that they can use to steal your identity. To add insult to injury, they may also ask you to make a payment up front to receive their supposed service. These are all fraudulent requests and you should avoid them.
Coronavirus phishing attacks are also rampant. These can take the form of official-looking emails made to resemble legitimate businesses and government agencies, like the Social Security Administration. These emails usually have a link they ask you to click – don’t do it! Clicking on the link can take you to a fraudulent website, or even download malware to your computer. The malware silently installs itself and can monitor your computer use, steal sensitive information and destroy your data.
Watch Your Tax Bracket
If you are older than 59-½, you can withdraw money from your traditional IRA or 401(k) without paying the 10 percent early withdrawal penalty. You may feel the necessity to make such withdrawals to replace lost income. These are taxable distributions that you must include in your annual taxable income.
The more you withdraw, the greater the potential impact on the taxes you’ll pay on your Social Security benefit. For example, you’ll be taxed on up to 50 percent of your Social Security benefit if your income is between $25,000 and $34,000 for single filers. The range for joint filers is $32,000 to $44,000. Go above these limits and you can be taxed on up to 85 percent of your Social Security benefits.
On the other hand, the Coronavirus pandemic raised the age at which you must start taking Required Minimum Distributions (RMDs) from your retirement accounts. That age is now 72 (up from 70-½). So, if you are still working through the pandemic but have reached aged 70-½, you can continue to shelter some of your income to keep your Social Security tax as low as possible.
If you need money from your 401(k) to help you get through the pandemic economy, you can now borrow up to $100,000 from your account. This is a loan, so you don’t include it in taxable income. That means you can use this money without it causing your taxes on your Social Security benefits to increase. You have five years to repay the loan with interest (although you get to keep most of the interest you pay in).
This can be a desirable alternative to simply withdrawing money from your 401(k), but please note: It is always wise to discuss your plans with a financial advisor you trust before making any decision that can affect your financial future. These 401(k) loans are not for everyone and can be more confusing than they seem. Reach out to your financial advisor before making a decision. When finding a financial advisor for retirement, make sure he or she understands the ins and out of Social Security.
Will Events Overwhelm the Social Security Administration?
You can start taking Social Security benefits at age 62 and must start receiving benefits starting at age 70. The longer you wait, the more you’ll receive each year. But if you lose your job due to the pandemic, you might decide to start taking Social Security benefits earlier than planned. Multiply this effect by millions of out-of-work Americans and you have the potential for the Social Security Administration to be overwhelmed. This can result in the delayed start of your benefits. It can also make it harder to reach a human at the SSA.
Your Social Security benefits should continue to flow despite the Coronavirus pandemic. However, long-term effects on the system are possible. In addition, fraudsters will be on the prowl to take advantage of confusion about the pandemic and the government stimulus. Be careful and turn to reliable sources to keep up with the latest developments. Do not be fooled by untrustworthy news, especially if it comes from social media or extremist “news” organizations. Fake news can be hazardous to your health and your finances.
If you’re currently in the process of finding a financial advisor for retirement, contact the fee-only fiduciaries at Global View.