Investors have had a remarkable year as the stock market continues to experience unprecedented growth. Since the market bottomed out in March of last year due to the COVID-19 pandemic, the S&P 500 is up by nearly 90%.
However, this type of growth can’t last forever. Although nobody knows for certain when another crash will hit, it will inevitably arrive sooner or later — and some experts believe a market downturn is right around the corner.
If you’re close to retirement and are considering claiming Social Security benefits, how could a market crash affect your strategy? Should you file for benefits now if the market takes a turn for the worse? Here’s what you need to know.
Why it may make sense to claim now
There are advantages and disadvantages to claiming Social Security when the market plummets. One advantage is that it could potentially help your savings last longer.
Market downturns are one of the worst times to withdraw your money from your retirement fund. When the market collapses, stock prices fall — making your portfolio less valuable. If you withdraw your savings, you’re selling your investments. And by withdrawing your money when prices are low, you could end up selling your stocks for less than you paid for them, thus locking in your losses.
If you know you’re going to retire soon, it may make sense to claim Social Security now rather than delaying benefits. This way, you won’t be relying entirely on your savings to make ends meet. Social Security alone may not be able to cover all your retirement expenses, but it can reduce the amount you have to withdraw from your savings during a market downturn, helping your money last longer.
When it’s better to hold off on claiming
That said, there are also some situations where you’re better off waiting to take Social Security. If your job is secure and you’re able to continue working, it may be wise to delay retirement by a year or two until the market stabilizes.
This will not only give you more time to save, but you’ll also avoid withdrawing any money from your retirement fund when stock prices are lower. As a bonus, when you delay claiming Social Security benefits past age 62, you’ll receive larger checks each month.
Waiting to claim benefits could be an especially smart idea if your savings are falling short. By waiting until age 70 to claim, you could receive up to 32% extra each month on top of your full benefit amount. You’ll continue collecting these larger checks for the rest of your life, regardless of how the stock market performs.
Protecting your savings against stock market volatility
The stock market will always experience ups and downs, and there’s no way to avoid market downturns entirely. You can, however, take steps to minimize the effect of crashes on your savings.
One thing you can do is adjust your asset allocation as you get older. When you’re young and still have decades until retirement, the majority of your portfolio should be invested in stocks. While they are riskier than bonds and other conservative investments, they also experience higher returns, on average.
As you get closer to retirement, then, it’s a good idea to shift your portfolio toward more conservative investments. You’ll still want a portion of your savings in stocks to help your money grow faster, but by investing more conservatively, your retirement fund won’t be hit quite as hard by market crashes.
Deciding when to retire and claim Social Security can make a significant difference in how long your savings last, especially if a market crash is on the horizon. If you know you’re going to retire soon, claiming benefits now might be a smart move. On the other hand, if you can afford to work a few more years, delaying Social Security could result in bigger checks each month.
Regardless of which option you choose, make sure you’re making this decision carefully. If the market does crash soon, you’ll want to be as prepared as possible to maximize your retirement income.
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