For some, claiming early means truly retiring with much less anxiety about portfolio risks. Take someone that can be happy on $40,000/year who has $500,000 and a $20,000/yr. Social Security benefit at age 62. If he takes the Social Security, he only needs $20,000 from his holdings. That’s a reasonable 4 percent withdrawal rate. If he opts to delay and has a bad year, say a 25 percent drop in his portfolio, the math could change his comfort level dramatically.
$500,000 less $40,000 is $460,000. Drop that 25 percent and he is left with $345,000 and the $41,200 needed in year two (3 percent inflation), represents a withdrawal rate of over 11.5 percent. Even if he turns on Social Security ($21,400 at 63), his withdrawal rate is a much less comfortable 5.74 percent.
Use whatever numbers you like for a comfortable withdrawal rate. It will still be true that delaying Social Security can put more stress on a portfolio. A good generalization like “delaying is smart,” can’t apply across the board. Every situation needs to be evaluated independently. Financial planning is not about rules of thumb.
Dan Moisand, CFP, has been featured as one of the America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected]