For Americans who choose to claim Social Security benefits at age 63 while continuing to earn a salary of $60,000, the Social Security Administration enforces an earnings test. This rule requires that $1 in benefits be withheld for every $2 earned above the annual exempt amount. Because the individual is under full retirement age, a significant portion of their monthly Social Security check may be temporarily withheld until they reach their full retirement age, at which point the withheld benefits are recalculated and added back to the monthly payment.

To bridge this income gap, financial commentators suggest that retirees consider dividend-paying Exchange Traded Funds (ETFs). The strategy focuses on generating passive income to replace the cash flow lost to the earnings test. Yahoo Finance highlights three specific ETFs—the Schwab US Dividend Equity ETF (SCHD), the Vanguard Dividend Appreciation ETF (VIG), and the iShares Select Dividend ETF (DVY)—as potential vehicles for this purpose. These funds are selected for their focus on companies with histories of consistent dividend payments.

However, this approach introduces market risk that is not present in Social Security benefits. While Social Security is a government-backed, inflation-adjusted annuity, ETFs are subject to market volatility, and dividend payouts are not guaranteed. Investors must weigh the immediate need for cash flow against the risk of losing principal in a market downturn. Financial planners generally advise that retirees should not rely solely on equity-based investments for essential living expenses, as the potential for capital loss could jeopardize long-term financial security.