Down markets can present a difficult decision for new retirees. On one hand, withdrawing money from the market during a downturn can lock in investment losses, wreaking havoc on the longevity of their retirement plan.
Conversely, avoiding portfolio withdrawals early in retirement may require retirees to claim Social Security as soon as age 62. This guarantees a lower lifetime benefit, which may hurt them just as badly.
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To see which option is better in a down market – tapping your retirement savings early so you can delay Social Security or claiming Social Security at 62 to avoid portfolio withdrawals – SmartAsset ran the numbers.
Let’s Compare: Delayer Dave and Eager Emily
Two hypothetical retirees employ different income strategies during a down market.
Our first retiree, Delayer Dave, chooses to delay Social Security and live solely on portfolio withdrawals for the first four years of retirement. Dave will wait to claim his full Social Security benefit when he is 67, which will reduce the amount of money he must withdraw from his portfolio each year thereafter.
The other retiree, Eager Emily, claims Social Security immediately at age 62. This locks in a reduced lifetime benefit, but it means she won’t have to withdraw as much money early in retirement from her portfolio.
Both Dave and Emily are 62 and earned the average income – $58,760 in 2021, according to the Bureau of Labor Statistics – for people in their age group (55 to 64 years old). We presumed the two retirees would aim to replace 75% of their pre-retirement income each year ($44,070 in the first year of retirement) with Social Security and portfolio withdrawals.
Dave and Emily each have $408,420 – the average retirement savings for people 55 to 64 years old, according to the 2019 Survey of Consumer Finances. That money is invested in a 60/40 portfolio, with 60% allocated to stocks and 40% to bonds.
To see how both Delayer Dave’s and Eager Emily’s strategies would fare during a down market, we assumed their portfolios lost 15.3% their first year of retirement, just as an average 60/40 portfolio did in 2022. From then on, their portfolio would grow 5% each year minus whatever they withdrew. While 60/40 portfolios have historically returned about 8% annually, we’re erring on the side of caution as the market recovers from a downturn, and retirees commonly reduce the risk in their portfolio as their retirement progresses.
We assumed the retirees would increase their withdrawals by 2% each year to account for the target inflation rate, and that portfolio growth or losses occur at the outset of each year. To calculate Social Security benefits, we used SmartAsset’s Social Security calculator.
Strategy 1: Delay Social Security
Since Dave must live exclusively off his portfolio withdrawals early on, he withdraws nearly $230,000 during his first five years of retirement. This, coupled with the 15.3% drop in value that his 60/40 portfolio suffers in year 1, leaves Dave with just shy of $170,000 left in his portfolio going into his sixth year of retirement.
By now, though, Dave has reached his full retirement age and his Social Security benefit is worth $31,828 per year. That means his annual portfolio withdrawal drops from $47,703 in his fifth year to less than $17,000 the following year.
But Dave’s heavy withdrawals early in retirement lead him to completely exhaust his portfolio during his 18th year of retirement at 79 years old. The following year, he relies solely on Social Security benefits, which are now worth $41,173 per year. Social Security will eventually pay him $51,193 in his 30th year of retirement at age 91 – $11,633 more than Emily.
Strategy 2: Collect Social Security at 62
Eager to limit her portfolio withdrawals early on, Emily claims Social Security at 62 and collects $22,268 in year 1. As a result, she only has to withdraw $21,802 from her portfolio, limiting her exposure to sequence of returns risk, which refers to the hazards posed by making early retirement withdrawals during a down market.
The strategy means Emily’s investment portfolio will last three years longer than Dave’s. Emily doesn’t deplete her portfolio until year 21 of retirement at age 82, but her Social Security will only pay her $33,102 at that point. This strategy also means Emily’s annual retirement income falls more precipitously once her savings are exhausted, going from $64,202 in year 20 to just $33,764 by year 22.
The Verdict: Should You Delay Social Security or Tap Your Investments in a Down Market?
There are a couple of ways to look at it.
From a total return standpoint, delaying Social Security by five years leaves Dave with slightly more total retirement income than Emily. Over the course of a 30-year retirement, Dave collects $1,479,617 in portfolio withdrawals and Social Security checks, compared to Emily’s $1,460,674.
“Stepping back and looking at the totality of a retiree’s income across all years paints a clear picture that the longer someone can delay, the greater the total dollars they will likely access over the course of their sunset years,” says Mark Hayes, a certified financial planner and founder of Infinitive Wealth Advisory in Fishers, Indiana.
While Emily's annual retirement income falls by 47% between ages 81 and 83, Dave's higher Social Security helps lessen the income drop once he depletes his savings. Dave sees his annual retirement income go from $60,499 at age 78 to $41,173 two years later – a 32% reduction.
Then again, it takes 29 years for Dave’s total retirement income to surpass Emily’s. Someone who doesn’t expect to live deep into their 80s or 90s may be better served claiming Social Security early. Hayes says a person in this situation should consider how long they expect to live and how they feel about the possibility of outliving their money.
However, different choices and situations – from your investment portfolio to historical income to stock market growth – may affect the outcomes. You can input your own numbers to SmartAsset’s Social Security calculator and investment calculator to make personal estimates.
Finding Alternatives
A person facing this retirement conundrum has other options.
Hayes says you may need to reduce your income expectations or delay retirement altogether in a down market. And if you’re planning to retire within one year, he recommends setting aside six to 12 months' worth of living expenses in cash or cash equivalents to insulate you from a market downturn like the one in 2022.
Another route is purchasing a single premium immediate annuity (SPIA), which converts your retirement savings into a guaranteed stream of income for life, akin to a pension, he says.
“In the spectrum of retirement income planning, the highest income a person can get is by shoving all of their money across a table to an insurance company in exchange for a SPIA,” Hayes says. “In doing that, however, you essentially relinquish all control of the money, and income payments will cease the day you die, whether that is 40 years from now or tomorrow.”
Bottom Line
When retiring in a down market, you may have to decide between withdrawing heavily from your portfolio to delay Social Security or claiming your benefits early to preserve your savings longer. After running some typical numbers, we learned that the former strategy produces more total retirement income than the latter but it may only be worth it if you plan to live long in retirement. Someone with a shorter life expectancy may be better served claiming Social Security early.
Investing and Retirement Tips
- Hire a professional. A financial advisor can help you invest and plan drawdowns during any market cycle. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security plays a critical role in many retirement plans. Deciding when to initiate Social Security benefits can be key to maximizing retirement income. SmartAsset's Social Security calculator can help you determine the best time to claim your benefits.
Questions about our study? Contact press@smartasset.com.
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