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Should you pull from Social Security or your retirement portfolio first?

One of the most common questions we hear is what retirement account people should pull from first – our savings account or social security. Well, as always, it depends. But let’s look at some factors that can have a great impact on your decision to pull from one or the other first.

Pulling from Social Security First

If you are retiring in a market downswing, it may be better to start pulling social security benefits first. This is because monthly withdrawals from a shrinking nest egg will hinder its ability to fully recover once the market swings back up. In fact, many years in a row of market downturns combined with retirement income withdrawals can leave a portfolio reduced to a shadow of its former self. In such a case, you are putting yourself at extreme risk that your savings will not last for life. Such a situation is called a Negative Sequence of Returns and it wreaks havoc on retirement portfolios!
Graph of a portfolio balance shrinking
In this graph, we see how consecutive negative returns in the early years of retirement prevent the principal from making great enough gains in later years to make up for initial losses, leading to catastrophic results for the portfolio.
Therefore, it may be better to start pulling from social security before pulling from your personal retirement account. Better yet, just keep working, if possible. Hold off as long as you can to start pulling from your retirement accounts to give the markets time to recover. In fact, leaving your assets untouched may be a huge boon to your portfolio, as the biggest market runs and gains occur after market downturns. Your portfolio will thank you later after it swells to previously unseen proportions!

Pulling from Personal Retirement Accounts First

On the flip side, it may be beneficial to hold off on pulling from social security. In case you didn’t know, social security benefits, if left untouched, continue to grow until the age of 70, eventually leaving you with a 124% benefit. That’s an additional 24% of FREE money and a huge return on your investment! You’ll rarely come across such high return rates in the investment world, let alone guaranteed. So, if you are retiring in a period of market highs with a strong portfolio, it may be advantageous to pull from your retirement accounts first and let that social security benefit grow.
Delaying pulling from social security will also protect your monthly income from the eroding effects of inflation. Inflation rates as low as 3% can see costs of living double in just 20 years. If you retire early at 62, receiving just 70% of full retirement, and then live thirty years, your age 62 social security income will be paltry compared to the age 92 cost of living.
If you can manage to wait until you are 70 to start getting a monthly income, you will get a 124% retirement. That extra money will help stave off inflation over the long run. It will also keep you in a lower tax bracket, giving you time to pull from tax-deferred retirement plans at a lower tax rate than you would otherwise be in.
Of course, the greatest thing about social security is that it’s a lifelong guaranteed income, unlike a retirement portfolio. While it is important to plan to stretch your savings until you die, social security will be there to fall back on when and if you need it. If you are nearing retirement, we can advise you on the best course of action given your specific circumstances. Of course, these numbers only make sense if you plan on retiring in the next few years.
Nobody can tell the future, but one thing is almost certain – social security is set to run dry in 2035. If you don’t plan on retiring soon, you better not count on social security. It’s up to you to start saving today, and up to us to create a plan that will let you flourish through a long and happy retirement!

About the Author

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

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