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 worried about a dwindling portfolio balance during these turbulent times, you may be thinking about claiming Social Security ASAP. Before you move forward with this strategy, though, there are a few key things to consider.
Don't make a long-term decision in reaction to short-term conditions
Claiming Social Security is a permanent choice for most people. It can be undone in certain situations but only within 12 months of your initial claim and if you can pay back all of the benefits you've received to date. That means you're most likely stuck with your decision when you file for benefits.
Since starting your checks any time before the age of 70 means accepting a monthly payment smaller 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.
Rather than moving forward with starting your checks, think about why you want to claim Social Security now instead of waiting and how doing so could affect your long-term retirement finances.
If you are worried you would have to sell your investments at a low point in the market to generate income, and you won't be able to wait for the market recovery that's all but certain to eventually come, then starting Social Security to preserve your nest egg and avoid locking in losses can make sense.
But if you have enough saved to cover your essentials without selling your holdings during this market downturn, then do not rush into claiming Social Security. And ideally, this will be the situation you find yourself in since retirees don't want to be overexposed to the stock market precisely because of conditions like what we're currently experiencing.
Seniors should have an appropriate mix of assets that preserves their wealth as they approach retirement. They should also have a few years' worth of liquid savings so they can wait out short-term volatility without making major financial decisions that can hurt them in the long run.
How should you decide when to claim Social Security?
You should make your choice regarding Social Security based on your efforts to maximize your monthly and long-term retirement income — not based on how your portfolio is performing in any given month or year.
For many people, waiting to claim benefits is the best choice. The Social Security program was originally designed so the age someone started collecting benefits wouldn't matter. Early filers got smaller checks but more of them. Late filers got fewer checks, but each one was bigger. However, this formula was put into place when life expectancies were shorter. Now, many people outlive those earlier projections, and as a result, people can collect so many checks with delayed retirement credits that in total, they more than make up for the payments foregone as a result of waiting to start benefits.
But you'll need to think about your health to decide whether the certainty of starting payments early outweighs the possibility of collecting more in total benefits if you wait. It's this trade-off that should guide your decision. Otherwise, revisit your portfolio allocations to reduce your risk exposure if you're at or near retirement. That will allow you to make your Social Security decision based on what's optimal for you situation, not out of panic that your investments won't support you during a down market.
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