Market Timing and Claiming Social Security
Many of you may be familiar with the 4% Withdrawal Rule. According to this rule, you should try to withdraw no more than 4% of your retirement portfolio’s value each year. This withdrawal rate will theoretically allow the rest of your retirement savings to grow during the rest of the year.
However, many of you likely do not rely entirely on investment portfolios to fund your retirement. Instead, you may also use Social Security, pensions, and other income sources. With that in mind, you can consider a withdrawal strategy in which you plan your investment withdrawals and Social Security claims according to market performance.
Consider a theoretical investor named Ann. Ann is 68 and has not yet claimed her Social Security benefits. She also has her IRA funds invested in the stock market. Ann has decided to retire, and in her first year of retirement, she could withdraw 4% of her retirement portfolio’s value and live entirely off of that withdrawal. With that in mind, she is wondering: should she delay taking Social Security in order to increase her benefit? Market performance could impact the best decision for Ann. On one hand, if equities are experiencing significant growth, it may make sense for Ann to claim Social Security at 68. She could then withdraw fewer funds from her investment portfolio. Because the stock market is performing well, more of her investments could continue to grow. However, if the stock market isn’t performing as strongly, Ann may consider withdrawing from her investment portfolio to cover her expenses and delaying her Social Security claim. Her benefit could then increase until she turns 70, and she won’t experience as significant of an opportunity cost when withdrawing funds from her investment portfolio.
On the flip side, Ann and her investment manager may decide it is not in Ann’s best interest to withdraw from her investment accounts during a down year, such that her securities have time to recover. The investment manager may accordingly recommend that Ann claim Social Security.
Of course, this strategy is more complex than it sounds. You must first determine how you decide if the stock market is doing “good” or “bad”. If you’re more heavily invested in stocks, you might track the S&P 500 to determine general market performance. However, if you have more bond or preferred stock exposure, other metrics may be more appropriate. Additionally, we would need to consider all of your individual circumstances to determine the best Social Security and savings strategy for you. Reach out to us, and we can arrange a time to plan for your financial future.
