It's been a volatile year for investors, as stocks plunged into bear market territory in March and then tanked again in early September. And while volatility can be a nightmare for all investors, it can be especially worrisome to retirees -- specifically, those who rely on their 401(k) and IRA investments to generate the income they need to cover their living expenses.
If you're nearing retirement and are concerned that a future stock market crash or series of crashes might cause you financial difficulties as a senior, here's one move worth making: Hold off on claiming your Social Security benefits.
It pays to wait on Social Security
What does delaying your Social Security filing have to do with protecting yourself from a stock market downturn? A lot, actually.
You're entitled to your full monthly Social Security benefit based on your personal earnings history once you reach full retirement age. That age is either 66, 67, or somewhere in between, depending on your year of birth. You're allowed to claim Social Security before full retirement age (starting at age 62) for a reduced benefit, or you can delay Social Security all the way up until age 70 and boost your benefits by 8% a year in the process. And to be clear, that boost will be permanent.
Here's how that ties into the stock market. If you're able to collect a higher monthly Social Security benefit throughout retirement, you'll be less reliant on your retirement savings to stay afloat. Then, if the stock market does crash, a higher benefit may give you the option to either take much smaller withdrawals from your savings to avoid locking in major losses or, better yet, leave your savings alone completely and ride out those storms.
Imagine you'll need $2,500 a month to cover your living costs as a senior, and you're entitled to $1,600 a month in Social Security at a full retirement age of 67. If you delay your filing for three years, you'll grow that benefit to $1,984. That means you'll only need to withdraw $516 a month from savings, not $900.
Now, let's say you go this route and the stock market crashes early on in retirement. You may, in that situation, be able to cut back on expenses so that you're only removing $250 a month from your savings, thereby minimizing your investment losses. But without that Social Security boost, you'd likely be withdrawing -- and losing -- a lot more.
Of course, claiming Social Security at age 70 often means working until age 70, and that could be a mixed bag if you hate your job and can't wait to escape it. On the flip side, if you push yourself to hold off on both Social Security and retirement until 70, you'll also get an opportunity to boost your savings or, at the very least, leave your existing savings alone for longer. And that, too, could put you in a much stronger financial position throughout your senior years.