How to use 2 Social Security strategies for emergency funds

David G. Freitag

By David Freitag CLU, ChFC, CRPC
David Freitag is a financial planning consultant and Social Security expert for MassMutual.
Posted on May 11, 2020

The Department of Labor reports that the unemployment total for April is grim, with over 20.5 million people out of work because of the COVID-19 pandemic. This represents a 14.7 percent unemployment rate which is also grim when compared to the 3.5 percent unemployment in January of this year. With data like this, it is safe to assume that a great many people included in these statistics now need access to cash like never before. It is also safe to assume that many of these people are 66 or older and wonder if they could or should turn on their Social Security benefits as a way to weather the storm.

The answer is maybe.

In fact, by using a unique combination of two strategies, they can gain immediate access to a large lump sum of cash without doing a great deal of damage to their long-term Social Security benefit payments in retirement.

Strategy Number 1: Voluntary suspension

This is a well-established Social Security strategy that allows workers already collecting benefits, who have reached their full retirement age, to stop their Social Security checks and earn delayed retirement credits. (Related: Understanding voluntary suspension)

When earned, delayed retirement credits increase their benefits by 8 percent, simple interest, each year they wait. Delayed retirement credits can only be earned between full retirement age and age 70.

Strategy Number 2: Retroactive payments

Another well-established Social Security strategy allows workers, who are past their full retirement age, to request a retroactive refund of benefits. The maximum number of retroactive monthly benefits are capped at 6 months. These retroactive benefits are paid in a lump sum upon request.

To see how this combination of strategies might work, let’s look at a hypothetical example.

Bob, age 67, is past his full retirement age of 66. Bob has been working and planned to wait until age 70 to start taking his retirement benefits from Social Security. With a full retirement age of 66, Bob could have earned up to 32 percent more income by delaying his benefit payments until age 70. Unfortunately, due to the COVID-19 pandemic, Bob found his name on his company’s furlough list. As a result, his income is now severely reduced, and he needs immediate income.

Bob goes to the Social Security Administration website and applies for his retirement benefits. This online process is not complicated and takes about 20 minutes to complete. When asked when he wants to start his benefits, Bob requests a start date of six months before the current date. He requests an immediate, six-month lump sum payment of his benefits now. This payment can be substantial. In some cases, it could range up to +/- $18,000. There is no need to repay this retroactive benefit.

There is a downside to requesting a retroactive payment, however. In Bob’s case, he forfeits six months of delayed retirement credits. But, in this case with an immediate need for cash, Bob is OK with the 4 percent loss of delayed retirement credits.

Now, turn the clock ahead in this example. Once Bob receives his lump sum check, he immediately asks for a voluntary suspension of his benefits.

By combining these two strategies, he has immediate cash now and resumes earning those important delayed retirement credits. In six months, he restores the loss of his credits and continues to earn those credits until age 70. Overall, he loses 4 percent in delayed retirement credits but gains access to cash which prevents his lifestyle from cratering. He now has the means to pay his mortgage, utility bills, car payments and buy groceries.

Additionally, Bob now has access to immediate cash independent of government stimulus support and without having to go through a bank or local lending institution. He just needs 20 minutes and access to the internet.

Social Security has often been referred to as a financial safety net to help seniors through retirement. Using this combination strategy could very well provide a lifeline for immediate financial stability. It also buys time for the economy to recover and for employment to return to more normal levels.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.