Should You Draw Your 401(k) to Delay Social Security?
As retirement approaches, many individuals find themselves facing important financial decisions that can greatly affect their long-term financial health. One of the most pressing questions for those nearing retirement is whether to draw on their 401(k) savings to delay taking Social Security benefits. This decision entails understanding the implications of both choices: accessing retirement savings early and postponing Social Security benefits.
Understanding Social Security Benefits
Social Security provides a foundational income for retirees, but the amount received can vary significantly depending on when you choose to start claiming benefits. The earliest age to begin collecting Social Security is 62; however, doing so results in a permanent reduction in benefits. Conversely, if you delay claiming Social Security past your full retirement age (typically 66 or 67, depending on your birth year), your benefit will increase up to age 70 through delayed retirement credits. Each year you delay can increase your monthly payment by approximately 8%, resulting in a potential 32% increase in benefits compared to claiming at full retirement age.
Advantages of Delaying Social Security
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Increased Monthly Benefits: By delaying Social Security, retirees protect their standard of living against inflation over time since Social Security benefits are indexed for cost-of-living adjustments (COLAs).
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Longevity Protection: If you live longer than average, delaying Social Security can be financially beneficial. The increased monthly payments can provide a higher income stream in your later years, which is particularly crucial if you face increasing healthcare costs.
- Tax Benefits: For some retirees, postponing Social Security while actively withdrawing from a 401(k) can reduce taxable income in the short-term, potentially lowering tax obligations in retirement.
Financial Implications of Drawing on Your 401(k)
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Immediate Access to Cash: Drawing from your 401(k) provides immediate funds, which can ease short-term financial stress, allowing retirees to maintain their current lifestyle.
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Potential for Investment Growth: Withdrawing from your 401(k) means less money invested in the market. If market conditions are favorable, remaining invested could yield higher returns than the additional money gained from delaying Social Security.
- Withdrawal Rates: It is crucial to consider the withdrawal rate from your 401(k). Financial experts often recommend a sustainable withdrawal rate of around 4% per year. Withdraw too much too soon, and you risk depleting your retirement savings.
Factors to Consider
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Your Health: Assess your overall health and family history. If you have reasons to believe you will live longer, it may be more beneficial to delay claiming Social Security.
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Your Current Financial Situation: If you have adequate income from other sources, you might opt to delay Social Security. Conversely, if you require the income now, accessing your 401(k) may be necessary.
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Investment Outlook: If your investments in your 401(k) are expected to perform poorly, tapping into those funds might serve you better in the short term.
- Tax Implications: Understand the tax consequences of both withdrawing from your 401(k) and the timing of Social Security benefits. Consulting with a financial advisor can help navigate this complex landscape.
Conclusion
Deciding whether to draw from your 401(k) to delay Social Security is a multifaceted decision that requires careful planning and consideration of your unique financial situation. Each choice carries potential benefits and drawbacks that need to be weighed based on your health, financial stability, tax implications, and retirement goals. Ultimately, the ideal strategy will depend on balancing short-term needs with long-term financial security. Engaging with a financial advisor can help solidify your plan and set you on the path to a secure and comfortable retirement.
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No no
So my take away from this video is that it is pretty much the same.
The big thing you missed in this video is the fact that taxes on Social Security should be illegal in the first place. Double taxation is illegal and that is exactly what is happening. SS recipients have already paid taxes on the wages when they were working and now when retirees desperately need this income the most to live the government gives them the shaft! Retirement may become a problem for Americans
As a soon retiree, keeping my 401k on course after a rocky 2022 is top priority. I have been reading of lnvestors making up to 250k ROI in this current crashing market, any recommendations to scale up my ROI before retirement will be highly appreciated.
Choosing a Roth IRA is advantageous as it uses after-tax funds and allows tax-free growth. When I retired, I had $3M million saved, and I won't be taxed on my withdrawals.
I would like to see some extra columns that account for taxes and RMD's. I use the Retirement Calculator from Fidelity, and it is chock full of useful information. I get three different scenarios to choose from after I input my information: Significantly Below Average Market, Below Average and Average Market. It shows approx taxes and RMD's being pulled out; and it's free. But otherwiase, very good video about the basics, just needs deeper information. Now subscribed!
Didn't include RMD. Totally worthless comparison.
Overlooks a critical aspect where most have far more than 90k in pretax… drawing down as much as possible prior to RMD to avoid huge taxes.drawing SS does little except either allow,you to draw down less or pay more in income tax that year @ a higher bracket.
Should I get my 401K first before applying for SS at 62? I only have $2000 from 401K
Doesn’t your analysis ignore taxes?
I had 10 years contributing to my ROTH 401k which allowed me to retire at 53 y.o., spending the principal without touching the gains in addition we sold the house than bought more real estate that has done very well along with a 72T withdrawal. Now at 59 will start ROTH conversions til 62 then will again rely on the proceeds of real estate sales, the ROTH conversions to get me from 63 to 65 when Medicare starts looking poor on paper so I do not pay any Medicare premiums. I’ll delay (SSA til FRA for me as the survivor benefit is only good to FRA)and will take my wife’s SSA at 70. At least that’s the plan.
I ran this scenario myself and also came up with a break even age of 84. I ran the scenario comparing full retirement age to age 70.
Holy Schmidt you're full of s*** what happens if the 401k goes down 50%. Then what take the money? It's 62. You're a producer of confusion. Anybody that listens to you is an idiot just like you
I think b is better with 491k usually around 10% gain
Ok so here is my question. Instead of taking social at 62, should I draw from my cd interest and some cd principal that equals my early social security payment and delay taking social until a later year?
Thank you.
Is this assuming a person is still working until FRA? And then DELAYING SS until 70 to get the DELAYED Retirement Credits…?!?!?
I think assuming 5% annual return of your 401k is too conservative. If you invest your 401k in a typical 60/40 low cost index portfolio, the historical average return is in the range of 8 to 9%, which is roughly equal to the social security annual increase if you delay until age 70. The other point to ponder is that even though SS probably will not completely go away, it is a likelihood that they will cut back the amount by delaying your FRA, so by delaying you keep chasing the moving goal post …