The Flexible Social Security Strategy

One of the biggest decisions that a family will make in retirement is when to draw social security. Start at age 62, and draw a smaller benefit but can limit retirement account distributions in your early years of retirement. Or, wait until 67 or even 70, and draw a larger benefit for a longer period of time. Most people feel like they have to make the decision before retirement and stick with their plan. Well, let me tell you about another strategy, which allows you greater flexibility and doesn’t require you to make a decision when you retire. I call this the flexible social security benefit.

Postpone taking social security…for now

The main thesis of the flexible social security benefit is to postpone taking social security until market conditions force your hand.  In other words, withdraw from your retirement savings while the stock market is doing well, and turn on social security when the stock market declines.  The benefit of this strategy is that you are not drawing down your retirement assets too much when the stock market is strong, although you haven’t turned on social security.  If the market has a sustained drawdown of 20% or more, you can turn on your social security benefit and limit withdrawals at that point. This will allow your assets to come back quicker when the market rebounds.

Pros and cons

Like any social security timing strategy, there are both pros and cons to the flexible social security strategy.

Pros

  • Allows social security to grow and limits impact of withdrawals on assets when stock market is going up
  • In a strong market, postpone social security and receive a higher amount over your lifetime
  • If market has a large correction, switching to social security, and limiting withdrawals, helps your account rebound more quickly

Cons

  • A 20% market drop early in retirement, could force you to turn on social security early, potentially impacting long-term retirement goals
  • Social security can take a couple months to turn on, therefore even if there is a large market drop, may need to continue large distributions for a couple months
  • Markets change rapidly, and you may not want to spend retirement looking over your shoulder worried about the next drop in order to make a social security decision

Recent Evidence

Obviously the stock market has been in an incredible bull market over the past 9 years. If you would have retired anytime in essentially the past decade, investment returns have probably been the least of your concerns. No, the past 9 years are not the norm, but you would almost certainly have been better off waiting to draw social security over the past decade and draw from retirement accounts instead. For example, if you retired 5-years ago, the beginning of 2013, and withdrew a pretty hefty 7% of your starting balance per year, you would still have nearly 22% more in your accounts than when you started.  This assumes a portfolio of 60% S&P 500 index ETF (SPY) and 40% U.S. bond index ETF (AGG).  In fact, there only would have been one year, 2015, in which you would have withdrawn more than you made on your investments.  

Now, compare that to retiring in 2007, right before the stock market lost more than half of its value.  In this scenario, during the correction, you would have turned on social security once the market started dropping.  This would hopefully allow you to slow down on distributions and let your remaining assets come back.  Still, you are now locked into a lower social security benefit for the rest of your life, and not a lot can save you when the market drops 55%.  

Deciding when to turn on social security isn’t easy, so it may be easier to not make a decision when you first retire.  You can hold off on taking social security and start taking larger withdrawals from your retirement investments.  This allows you to grow your social security benefit while the market is going strong, and gives you the flexibility to turn on social security when the market takes a downturn.  This type of flexibility isn’t for everyone, and it is almost impossible to model in a retirement plan, so hard to know if it is right or wrong strategy for the long-term.  Still, if the past five years have taught us anything, living off our investments are a lot easier when the market is soaring higher.   

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