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Social Security in a Down Market: Does it Make More Sense to File Early?

The most common question I’ve gotten from readers over the last few weeks has been whether the current stock market downturn is a point in favor of filing for Social Security earlier than would otherwise make sense.

Let’s try to tackle this question in a few different ways.

Which Assets Are You Spending Down?

As we’ve discussed in various places in the past (e.g., here, here, or my book), the money that is being used to fund the delay should be invested in something like a short-term bond fund, bond ladder, or CD ladder. That is, the portfolio that’s being used to delay Social Security should be (mostly) inoculated against market risk and sequence of returns risk.

Here’s how retirement expert Steve Vernon explains it:

In the years leading up to retirement, an older worker might want to use a portion of their retirement savings to build a “retirement transition bucket” that enables them to delay Social Security benefits. While there’s some judgment involved with the necessary size of this bucket, a starting point would be an estimate of the amount of Social Security benefits the retiree would forgo during the delay period.


The retirement transition bucket could be invested in a liquid fund with minimal volatility in principal, such as a money market fund, a short-term bond fund, or a stable value fund in a 401(k) plan. This type of fund could protect a substantial amount of retirement income from investment risk as the worker approaches retirement, since the retirement transition bucket would be invested in stable investments and Social Security isn’t impacted by investment returns.

In Social Security Made Simple, I suggest something similar, using a CD ladder instead.

More broadly, assuming that you have bonds (or other fixed-income) in your portfolio, the Social Security decision is primarily, “do I want to exchange some bonds (or other fixed-income) for more Social Security?”

And that decision isn’t especially impacted by what the stock market has done lately. It is impacted by market interest rates. Right now, real interest rates are super low, which is a major point in favor of delaying Social Security (because the bonds that you’re giving up have lower expected returns than they would if interest rates were higher).

Do the Analysis: Using a Calculator

One useful thing to do when answering the question of “do I want to exchange some bonds for more Social Security?” is to use a Social Security calculator. Naturally, I’m partial to Open Social Security because:

  1. It’s free,
  2. It’s open-source,
  3. It uses more realistic mortality modeling than other calculators do, and
  4. I built it, so I’m super duper biased.

But use a different calculator if you’d like.

When you do that analysis, you will find that in most cases:

  • Spending down bonds in order to delay filing is very beneficial for the higher earner in married couples (with some specific exceptions, such as when there is a minor child or adult disabled child, or when the lower earner does not qualify for a retirement benefit of his/her own and will be at least full retirement age by the time the higher earner reaches age 70);
  • Spending down bonds in order to delay filing is somewhat beneficial for unmarried people (i.e., beneficial on average — more beneficial if you’re in good health and less beneficial if you’re in bad health); and
  • Spending down bonds in order to delay filing is not especially beneficial for the lower earner in married couples. (Though if the lower earner is significantly older than the higher earner and/or both are in very good health, delaying would be more beneficial.)

What About Risk?

A common counterargument to the idea of spending down bonds more quickly in order to delay Social Security is something to the effect of, “but then I’m left with a higher stock allocation! And that’s too risky!”

But that makes no sense. Spending down bonds in order to delay Social Security doesn’t leave you with any more dollars in stocks than you would have had otherwise (i.e., when we look at dollars, which is what matters, rather than percentages, you have not increased your exposure to stock market risk).

For example if you have $400,000 in stocks and $400,000 in bonds — and you spend down $150,000 of those bonds in order to delay Social Security — you still have $400,000 in stocks. A stock market decline of a given percentage would not result in a larger loss than it would have previously.

In fact, a strong case can be made that a stock decline (or, in today’s case, a potential further stock decline) becomes less damaging when you exchange bonds for Social Security. The ultimate reason that stock market declines are a source of risk for retirees is that they mean an increased probability of outliving your portfolio. But if you have more Social Security income and less bonds:

  1. You are less likely to outlive your portfolio, because the Social Security income lasts for life and because it supports a higher level of spending than bonds do (which allows for you to spend from the rest of the portfolio at a lower rate), and
  2. If you do outlive your portfolio, you’re in a better situation with a higher Social Security check each month.

And yes, in some cases, it can make sense to spend bonds all the way down to zero in order to delay Social Security.

In case you think that that sounds crazy, here’s what Wade Pfau wrote in his recent book Safety-First Retirement Planning:

As for bonds, ultimately, the question is this: why hold any bonds in the part of the retirement portfolio designed to meet spending obligations? The income annuity [Mike’s note: Social Security is an income annuity.] invests in bonds and provides payments precisely matched to the length of retirement, while stocks provide opportunities for greater investment growth above bonds. Bonds alone hold no advantage.

Or here’s what Steve Vernon has to say:

Our analyses support investing the [unannuitized portion of the portfolio] significantly in stocks – up to 100% – if the retiree can tolerate the volatility. The resulting volatility in the total retirement income portfolio is dampened considerably by the high proportion of income produced by Social Security, which doesn’t drop if the stock market drops.

Spending/Withdrawal Rates

It can also be helpful to look at spending rates (i.e., the percentage of your portfolio that you’re spending each year in retirement).

Forget about Social Security for a moment. And forget about what the market has done over the last few weeks. Just look at where your portfolio balance is right now in relation to your spending. That is, what is your current spending rate when expressed as a percentage of your portfolio balance?

Almost certainly, your current spending rate (as a percentage) is noticeably higher than it was a month ago. Maybe it’s still low, and you’re not worried at all. Or maybe it’s now high enough that you’re starting to worry.

When a retiree’s desired spending level is high relative to their portfolio balance, that’s precisely the scenario in which annuitizing (i.e., buying a lifetime annuity with a part of the portfolio) is most likely to make sense.

Lifetime annuities allow you to safely spend more money than a stock/bond portfolio. We’ve discussed this before, but in brief the idea is that with lifetime annuities, the annuitants who die prior to their life expectancy end up subsidizing the retirement of people who live beyond their life expectancy. So each individual person can essentially spend an amount that’s based on their life expectancy, whereas in a normal (no-annuity) situation you have to spend less because you don’t actually know how long your retirement will last (e.g., spend a low enough amount each year such that you’d be confident your portfolio would last 30 years, even if your life expectancy is only 20 years).

And if you’re in a situation where a lifetime annuity makes sense, delaying Social Security is the best annuity around. (Though again, that’s much more true for higher earners in married couples and less true for lower earners in married couples.)

To Summarize

  1. Use the Open Social Security calculator. It helps you identify the filing age (or combination of filing ages) that is most likely to maximize the total amount you can spend over your lifetime.
  2. If you are concerned about the possibility of depleting your savings, please note that exchanging bonds for Social Security (i.e., spending down bonds in order to delay filing) generally has the effect of a) reducing the likelihood that you outlive your savings and b) reducing the ramifications if you do outlive your savings (i.e., you’ll be left with more income than if you hadn’t delayed).
  3. As far as the lower earner in married couples, it is generally not particularly advantageous for them to delay (though today’s very low interest rates do make it more advantageous than otherwise).
  4. The recent stock market downturn does not affect points #2 or #3 above.
  5. The Open Social Security calculator can help you identify the exceptions to points #2 and #3 above.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
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My Social Security calculator: Open Social Security