Patrick Villanova, CEPF«

Down markets can present a difficult decision for new retirees. On one hand, withdrawing money from the market during a downturn can lock in investment losses, wreaking havoc on the longevity of their retirement plan.

Conversely, avoiding portfolio withdrawals early in retirement may require retirees to claim Social Security as soon as age 62. This guarantees a lower lifetime benefit , which may hurt them just as badly.

A financial advisor can help you plan for retirement, no matter the market cycle. Find a fiduciary advisor today.

To see which option is better in a down market - tapping your retirement savings early so you can delay Social Security or claiming Social Security at 62 to avoid portfolio withdrawals - SmartAsset ran the numbers.

Let's Compare: Delayer Dave and Eager Emily
Two hypothetical retirees employ different income strategies during a down
market.

Our first retiree, Delayer Dave, chooses to delay Social Security and live solely on portfolio withdrawals for the first four years of retirement. Dave will wait to claim his full Social Security benefit when he is 67, which will reduce the amount of money he must withdraw from his portfolio each year thereafter.

The other retiree, Eager Emily, claims Social Security immediately at age 62. This locks in a reduced lifetime benefit, but it means she won't have to withdraw as much money early in retirement from her portfolio.

Both Dave and Emily are 62 and earned the average income - $58,760 in 2021, according to the Bureau of Labor Statistics - for people in their age group (55 to 64 years old). We presumed the two retirees would aim to replace 75% of their pre-retirement income each year ($44,070 in the first year of retirement) with Social Security and portfolio withdrawals.

Dave and Emily each have $408,420 - the average retirement savings for people 55 to 64 years old, according to the 2019 Survey of Consumer Finances. That money is invested in a 60/40 portfolio , with 60% allocated to stocks and 40% to bonds.

To see how both Delayer Dave's and Eager Emily's strategies would fare during a down market, we assumed their portfolios lost 15.3% their first year of retirement, just as an average 60/40 portfolios did in 2022. From then on, their portfolio would grow 5% each year minus whatever they withdrew. While 60/40 portfolios have historically returned about 8% annually, we're erring on the side of caution as the market recovers from a downturn, and retirees commonly reduce the risk in their portfolio as their retirement progresses.

We assumed the retirees would increase their withdrawals by 2% each year to account for the target inflation rate, and that portfolio growth or losses occur at the outset of each year. To calculate Social Security benefits, we used SmartAsset's Social Security calculator .

Strategy 1: Delay Social Security
Since Dave must live exclusively off his portfolio withdrawals early on, he
withdraws nearly $230,000 during his first five years of retirement. This,
coupled with the 15.3% drop in value that his 60/40 portfolio suffers in year 1,
leaves Dave with just shy of $170,000 left in his portfolio going into his sixth
year of retirement.

By now, though, Dave has reached his full retirement age and his Social Security benefit is worth $31,828 per year. That means his annual portfolio withdrawal drops from $47,703 in his fifth year to less than $17,000 the following year.

But Dave's heavy withdrawals early in retirement lead him to completely exhaust his portfolio during his 18th year of retirement at 79 years old. The following year, he relies solely on Social Security benefits, which are now worth $41,173 per year. Social Security will eventually pay him $51,193 in his 30th year of retirement at age 91 - $11,633 more than Emily.

Strategy 2: Collect Social Security at 62
Eager to limit her portfolio withdrawals early on, Emily claims Social Security
at 62 and collects $22,268 in year 1. As a result, she only has to withdraw $21,
802 from her portfolio, limiting her exposure to sequence of returns risk ,
which refers to the hazards posed by making early retirement withdrawals during
a down market.

The strategy means Emily's investment portfolio will last three years longer than Dave's. Emily doesn't deplete her portfolio until year 21 of retirement at age 82, but her Social Security will only pay her $33,102 at that point.