Retirement Hacks: Claim Social Security or withdraw from your 401(k) during a bear market? Think carefully

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Recession fears are spiking now that major indexes are approaching bear market territory, after months of market volatility that have put a strain on retirees’ and preretirees’ retirement portfolios. 

Read: Stock plunge puts S&P 500 on track to enter a bear market: What investors need to know

Those at an age to claim Social Security may be thinking about claiming sooner than previously planned to give them a source of income and to give their portfolio a chance to recover some losses. 

Retirement Tip of the Week: Weigh your options before beginning to claim Social Security–there is no one-size-fits-all approach.

There’s no right answer to when to claim Social Security. An individual receives 100% of the benefits they’re owed at Full Retirement Age, which depends on when they were born. Retirees can begin claiming as early as age 62, but any time before FRA results in a reduced benefit. Individuals can also receive more than what they’re owed for every month they delay up to age 70. Benefits are based on a formula that factors in age and earnings history. 

Have a question about your own retirement concerns? Check out MarketWatch’s column “Help Me Retire”

There’s also no right time to start withdrawing from a retirement account, or how much a person should take from these accounts every month. The 4% rule, which suggests individuals take 4% of their portfolio balance every year to stretch their money over their retirement, has been widely contested in recent years. Some experts state the withdrawal rate should be closer to 3% in an effort to make retirees’ money last their lifetimes. 

Market volatility and rising inflation has been a concern for Americans of all ages, but for retirees, it can be especially stressful as they tend to live on fixed budgets after leaving the workforce. Taking too much from an investment portfolio can trigger the sequence of returns risk, which is when a portfolio has fewer assets in it to grow when the markets rebound. Beginning Social Security too early, on the other hand, results in a permanently reduced benefit for the rest of one’s lifetime. 

Retirees might want to opt for taking from their 401(k) plans instead of Social Security, said Larry Kotklikoff, an economist and founder of Economic Security Planning, which has a Social Security analyzing software called MaxiFi Planner. During a Barron’s Live event, Kotlikoff said taking Social Security early to keep your investment portfolio intact, when adjusting for risk, can generate a negative return. Social Security is also inflation-protected, since there is a cost-of-living adjustment, which is a bonus for retirees whether they’ve begun claiming or not. 

See: Why you should wait to claim Social Security – even if stocks crash 

There’s certainly interest in taking from a 401(k) in an effort to postpone Social Security benefits. In a study about a 401(k) bridge option, which is when investors use assets from their retirement accounts equivalent to Social Security benefits so that they can delay claiming, more than a third of people who were given information about this option chose to try it. This survey, conducted from NORC from the University of Chicago and the Center for Retirement Research at Boston College, was likely the first time these respondents have heard of a “bridge,” and if there were more exposure to this option in retirement accounts, more Americans may choose it in their own retirement journeys, Alicia Munnell, director of the Center for Retirement Research at Boston College, wrote on MarketWatch.  

Of course, waiting to take Social Security isn’t always the best option either. One of the many factors retirees should consider when deciding when to claim includes medical history and status as well as longevity – someone who only expects to live to their mid-70s wouldn’t enjoy the benefits they worked hard for if they only started claiming at 70. In other instances, people may use Social Security as one component of their retirement income strategy, pairing it with annuities or a pension, and would rather their retirement savings vehicles, like a 401(k) or an IRA, continue to grow for the decades to come.

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