Will a recession hit in 2023? That's a question on a lot of people's minds right now.
The Federal Reserve has been raising interest rates for months in an attempt to slow the pace of inflation. But its interest-rate policies could fuel a major pullback in consumer spending as borrowing becomes prohibitively expensive. And that could be enough to spur a recession and a period of rampant unemployment.
As a general rule, it's a good idea to have money set aside in an emergency fund in case you lose your job — during a recession or otherwise. But since so many financial experts have been sounding warnings about a recession in 2023, it could make sense to beef up your savings in the coming months.
That may not be possible, though, especially if you're not a particularly high earner or have other expenses you're grappling with. And if you're nearing retirement age, you might just tell yourself that in a worst-case scenario, you'll file for Social Security ahead of schedule if a recession hits and you need money to pay your living expenses in the absence of having a job.
That may be a viable plan, in theory. But it could also have unfavorable long-term consequences.
There's a danger in claiming Social Security early
If you've already reached full retirement age (FRA) for Social Security purposes, you're eligible to collect your full monthly benefit based on your earnings history. FRA kicks in at 66, 67, or somewhere in between, depending on when you were born. But if you haven't yet reached FRA and plan to use Social Security as a fallback option if a recession strikes, you could end up in a dire financial situation down the line.
Claiming Social Security ahead of FRA will shrink your monthly benefit for life. And that's a hit you may not be able to afford if you don't have a very large nest egg.
The earliest age at which you can sign up for Social Security is 62. Let's say you'll be turning 62 in March and you're laid off at that point. If you don't have savings (retirement, emergency, or otherwise), you may have no choice but to claim Social Security right away.
But doing so will mean slashing your monthly Social Security benefit by 30% — for life. And that could put you in a very tough spot down the line.
That's why it's so important to do what you can to build up some savings, whether it's by putting more money in the bank or ramping up your IRA or 401(k) contributions. You can withdraw from an IRA or 401(k) plan without penalty once you turn 59 1/2, though you'll need to be careful about doing so during a recession. If stock values plummet at the same time, taking a retirement-plan withdrawal could mean locking in a permanent loss.
In fact, your very best bet is to have money in cash to cover several months' worth of living expenses. If you're still gainfully employed, you have an opportunity to build up more of an emergency stash. You may even want to hit pause on your IRA or 401(k) contributions if your emergency fund needs work, since that's money you might need to tap at a moment's notice. (Either that, or make sure to keep some cash in your retirement plan.)
Be careful when using Social Security as your backup plan
If you're old enough to claim Social Security in 2023 and a recession forces you out of a job, you can file for benefits and use that money to get by. But locking in a lower monthly benefit for life could leave you cash-strapped during your later years.
A better bet is to do what you can to boost your emergency cash reserves. That way, you won't have to rush your filing out of desperation.
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