The Biggest Retirement Income Mistake Isn't Claiming Social Security Early

If you've spent any time reading about retirement planning, you've probably heard some warnings about claiming Social Security too early. And you may be inclined to wait until full retirement age to file for Social Security to avoid reduced monthly checks for life.

The earliest age you can sign up for Social Security is 62. But for each month you claim benefits ahead of full retirement age, your monthly checks are reduced on a permanent basis.

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Clearly, slashing an income stream like Social Security is risky. But there's a potentially bigger mistake you risk making that could hurt your retirement finances even more.

You need a withdrawal strategy with built-in flexibility

Social Security ideally won't be your only source of retirement income. Hopefully, you'll have a decent chunk of money sitting in an IRA, 401(k), or another retirement account. But as dangerous as it could be to claim Social Security early, it could be even more detrimental to withdraw from your nest egg without a plan.

If you don't establish a smart withdrawal strategy and instead dip into your savings whenever the mood strikes, you could end up spending down your nest egg at a faster rate than expected. So instead of doing that, it's important to figure out what withdrawal rate to target.

That exercise, however, isn't enough. Having a withdrawal strategy could safeguard your retirement savings to some degree, but it's important to be prepared to adjust your withdrawal rate downward during periods when your portfolio has lost value.

If you don't reduce withdrawals during market downturns, you risk locking in permanent losses your portfolio can't recover from. Eventually, that could cause you to run out of savings, at which point you might only have Social Security to fall back on.

A better bet is to create a withdrawal strategy with built-in flexibility. You might tell yourself, "I'll reduce withdrawals by 10% when the market is down." Or, you might reduce spending even more, if there's room in your budget to do so.

Go in with a solid plan

It's important to claim Social Security at the right time, because your filing age determines how much monthly income you get from those benefits. And while claiming Social Security early isn't always a mistake, it can be risky.

But an even bigger risk is running out of savings because you didn't have a plan or didn't adjust it as needed for market conditions. So it's important to be both mindful and flexible when it comes to managing your nest egg.

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