Many retirees have lost money in the stock market this year and despite the recent rally, the bad times may not be over for investors.
If you’re concerned about a declining portfolio balance during these turbulent times, you may be thinking about claiming Social Security ASAP. Before moving forward with this strategy, however, there are a few important things to consider.
Don’t make a long-term decision in response to short-term circumstances
Claiming Social Security is a permanent choice for most people. It can be undone in certain situations, but only within 12 months of your first claim and if you can repay all the benefits you have received to date. That means you are most likely stuck with your decision when you apply for benefits.
Since starting your checks anytime before age 70 means accepting a monthly payment that is less than your maximum benefit, you don’t want to rush into the process, especially if you’re tempted to do so because of how your investments are currently performing.
Instead of continuing to start your checks, think about: Why you want to claim Social Security now instead of waiting and how it could affect your long-term retirement finances.
If you are concerned, you would have to sell your investments at a low point in the market to generate income, and you will not be able to wait for the market recovery that will almost certainly come eventually, then start social security to keep your nest egg and avoid trapping losses can make sense.
But if you’ve saved enough to cover your necessities without selling your property during this market downturn, don’t rush to claim Social Security. And ideally this is the situation you are in, as retirees don’t exactly want to be overexposed in the stock market because of circumstances such as what we are currently experiencing.
Seniors should have an appropriate mix of assets that will sustain their wealth as they approach retirement. They should also have a few years of liquid savings so that they can wait out short-term volatility without making major financial decisions that could hurt them in the long run.
How should you decide when to call on Social Security?
You should make your choice regarding Social Security based on your efforts to maximize your monthly and long-term retirement income — not how your portfolio performs in any given month or year.
For many people, waiting to apply for benefits is the best choice. The Social Security program was originally designed so that the age at which a person started collecting benefits would not matter. Early filers got smaller checks, but more of them. Late submitters got fewer checks, but they were all bigger. However, this formula was introduced when life expectancy was shorter. Now, many people survive those earlier projections, and as a result, people can cash in so many checks with deferred retirement credits that they more than make up for lost payments in total as a result of waiting to start benefits.
But you’ll need to think about your health to decide whether the security of starting early payments outweighs the possibility of getting more total benefits if you wait. It is this trade-off that should guide your decision. Otherwise, you’ll need to rethink your portfolio allocations to reduce your risk exposure if you’re on or near retirement. That allows you to make your Social Security decision based on what’s optimal for your situation, not panic that your investments won’t support you during a down market.