How I’d Invest Before Taking Social Security: Portfolio Strategies for Early Retirees

Retiring before you claim Social Security sounds great but there’s a hidden challenge many people overlook. If you retire at 62 but delay Social Security until 67, your investments need to carry the full weight of your expenses for those five years. And if the market stumbles during that time? Your entire retirement plan could unravel.

Let me walk you through what I’d do if I were in this situation specifically, what Becky (a hypothetical retiree) should consider when facing this exact scenario.

Becky’s Retirement Setup

Becky is 62, with a $1 million 401(k) portfolio and plans to spend $5,000 per month, or $60,000 annually, adjusted for 3% inflation. She doesn’t want to claim Social Security until age 67, so her investments need to fund her lifestyle entirely until then.

The problem? Becky’s entire portfolio is invested in U.S. large-cap growth stocks with an assumed return of 8.5%. That’s great in theory, but what happens if the market crashes during her first few retirement years?

The Withdrawal Crunch

During the five-year pre-Social Security gap, Becky’s portfolio will need to fund all her expenses potentially requiring 6.5% to 8% annual withdrawals. That’s well above the safe withdrawal range, especially in volatile markets.

Here’s the good news: once Becky turns 67 and starts Social Security, her need for portfolio withdrawals drops significantly from 8% to just 3.2% by age 68.

But surviving those first five years without sabotaging the entire retirement plan is the real test.

Why Early Market Losses Can Ruin Retirement

If Becky’s portfolio takes a major hit during those early years, her withdrawal percentage goes up. That’s the danger of sequence of returns risk the idea that losing money early in retirement is much worse than losing money later.

Bear markets typically last between 2.5 and 5 years. That means Becky could easily run into trouble if she doesn’t have a more stable, diversified portfolio to weather that period.

The Right Portfolio Shift: From Growth to Balance

To handle that five-year window, Becky needs around $380,000 to cover her expenses. Some of that say $80,000 might come from dividends (assuming a conservative 1.6% yield after a 20% dividend cut). But that still leaves $300,000 that needs to be safe from market swings.

That’s why I’d recommend shifting her portfolio to a 70/30 mix 70% in stocks, 30% in high-quality, short-term bonds. This gives her some growth, but also a layer of protection to draw from during market dips.

What Does This Do to Her Long-Term Plan?

Yes, moving from 100% stocks to 70/30 slightly lowers potential long-term growth. But here’s the trade-off: it increases her probability of retirement success. Her current all-stock plan has a 73% success rate. With the adjusted portfolio, that number climbs and her plan becomes much more resilient.

Once Becky hits 67 and her withdrawal rate drops, she can consider reallocating for more growth if her financial picture looks strong. But early on, stability matters more than potential.

Key Takeaways for Anyone Retiring Before Social Security

If you’re retiring before claiming Social Security, here’s what you need to know:

• Calculate your pre-Social Security gap and make sure you have a stable source of funds to cover it.
• Adjust your portfolio allocation to reduce risk during early retirement.
• Use short-term bonds or cash reserves to avoid selling stocks in a down market.
• Revisit your plan once Social Security kicks in and your withdrawal rate drops.

Retirement isn’t about hitting a perfect number it’s about creating a strategy that holds up when the market doesn’t. For Becky and for anyone else looking to retire before collecting benefits that means making smart portfolio moves now to protect your future freedom.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.