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The sharp stock decline amid the coronavirus pandemic, one of the fastest selloffs in market history, caused much soul searching for the tens of millions of people who are either at or near retirement age. Should I sell stocks or wait for the market to recover? Should I tap into my retirement funds now? What should I do about Social Security?
We have an answer. After talking to one of the nation’s leading experts on Social Security who generously crunched some numbers for MarketWatch and Retirement Weekly on his proprietary software, it’s clear that even if the stock market crashes just as you’re hitting full retirement age, it still pays to cash in some of your depleted portfolio to cover expenses and wait until age 70, the maximum age to take Social Security retirement benefits.
This analysis does not cover people who take Social Security before they reach full retirement age, which is 66 for those born between 1943 and 1954. Because of Social Security reform in 1983, full retirement age gradually moves up to 67 for people born in 1960.
Yes, markets have recovered somewhat and the panic has subsided. The S&P 500 index SPX, -0.30% and Dow Jones Industrial Average DJIA, +0.63% have rallied from their March 23 lows. But stocks still may retest those lows and bottom over the coming months. So, we wondered, even if the stocks in your retirement account fall by 50%, does it make sense to tap into those funds to cover living expenses while you wait until 70 to take Social Security?
Laurence Kotlikoff, a professor of economics at Boston University, wrote, along with Philip Moeller and Paul Solman, “Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security” and several other books about retirement and generational wealth. He is founder and president of Economic Security Planning, Inc. and ran several scenarios for us on the firm’s MaxiFi® Planner software.
For simplicity’s sake, we chose a single individual, Jane, who just hit full retirement age and had $500,000 in retirement assets, divided 50/50 between stocks and bonds. Her Social Security benefits at full retirement age are $30,000 a year. We assume a 50% decline in stock prices, which is hardly outlandish: The S&P 500 fell almost that much in 2000-2002 and lost more from 2007 to 2009. (It lost about a third of its value earlier this year.) Planners often calculate retirement income and expenses until 95 or beyond, but we ran the models until she hit 90.
The market crash takes her portfolio down to $375,000 as the $250,000 stock allocation loses half its value, while we assume the rest stays in bonds and cash. We tried two scenarios—one a zero real return, because of near-zero bond and cash returns and very high risk for stocks, and the other a 1.33% return, based on a 4% real annual return on the one-third of her portfolio still in stocks and a zero annual real return for the two-thirds in bonds and cash.
Still with us?
As the table below shows, taking Social Security immediately provides the smoothest retirement income stream throughout retirement, yielding $48,530 annually from 66 until 90 when stocks earn a real return of 4% a year and $45,939 under a zero-return scenario. But doing that also produces the lowest lifetime income (based on discounted present value of future cash flows) under both scenarios.
Should you wait to take Social Security?
Here’s how a market crash will impact your decision
| Scenario | Annual living std. Before age 70 |
Annual living std. Age 70-90 |
Total lifetime income* |
| 50% market decline; waits until 70; 1.33% annual portfolio return | $41,649 | $52,655 | $1,179,021 |
| 50% market decline; takes SS immed.; 1.33% real annual portfolio return | $48,530 | $48,530 | $1,133,642 |
| 50% market decline; waits until 70; 0% real annual portfolio return | $38,431 | $50,634 | $1,309,236 |
| 50% market decline; takes SS immed.; 0% real annual portfolio return | $45,939 | $45,939 | $1,235,336 |
| *Based on discounted present value of Social Security benefit payments | |||
| Source: MaxiFi Software from Economic Security Planning, Inc. | |||
Waiting until 70 to take Social Security and taking money immediately from her IRA or 401(k) would in either case give Jane the most lifetime income. But unless she continued working, had an additional pension or annuity or was able to tap into home equity, the $38 431 she got under the zero-return scenario for her first four years by waiting until 70 to take Social Security would likely prompt a lot of belt tightening. The $50,634 she’d get annually after 70, however, would be an easier lift.
The key here, of course, is the 8% a year guaranteed annual return from waiting to take benefits at age 70. “People should not rush to take their Social Security benefits. If there’s any other alternative, for most people they should wait as long as possible, preferably to age 70,” Kotlikoff told me. “If they are really cash-constrained they should take money from their retirement account first.”
Trouble is, an estimated 45% of boomers have no retirement savings to tap into. So, it’s no surprise more than half of all eligible Americans start taking Social Security before they hit full retirement age and only around 4% hold out until age 70. Are there circumstances under which taking Social Security early makes sense? We’ll get into that next time. But overall, it pays to wait as long as you can.
