Should I Delay Social Security and Rely on My 401(k) for 8 Years? I Have $750k in Savings and a Pension

Is it a viable plan to use my 401(k) for the eight years between retirement (age 62) and the max payout age for Social Security (age 70)? I have about $750,000 and I’m planning to take about $1,700 per month. I already have a pension of about $1,500 per month.

–Lynne

Waiting to file for Social Security in order to take advantage of the delayed credits is a good strategy for those who want to maximize their benefits. If you retire before you start claiming your benefits, you’ll need a source of income to bridge the gap between the time your paychecks stop and when your Social Security begins.

If you have a sufficient balance, then yes, withdrawing from your savings is a perfectly viable option to consider. However, that doesn’t necessarily mean it’s the best choice for you. There’s often more than one way to accomplish a goal and you need to consider your own preferences and concerns. (And if you need more help with important financial decisions in retirement, consider working with a financial advisor.)

Understanding Social Security Delayed Credits

As you know, your Social Security checks will be higher the longer you wait to claim them up until age 70. The flip side is they’ll be worth less if you claim them before reaching your full retirement age (FRA).

If you were born in 1960 or later, you’ll receive your full benefit at age 67. If you file for Social Security before reaching FRA, your benefit is reduced by a certain percentage for every month before you turn 67, up to a maximum reduction of 30% at age 62. However, each month you wait increases your eventual benefit up to a maximum of 24% at age 70.

To illustrate the difference, let’s assume your benefit will be $2,000 per month at age 67. If you choose to claim your benefit at age 62, you’ll only receive $1,400 per month (30% less). On the other hand, waiting until age 70 will boost your payment to $2,480 per month. That’s a big difference and it often makes a lot of sense to wait. (And if you need more help planning for Social Security, consider matching with a financial advisor.)

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Bridging the Gap With 401(k) Withdrawals

Of course, if you retire at 62 and wait another eight years to collect Social Security, you’ll need a way to cover your expenses until you turn 70. Your 401(k) is a natural place to look since retirement income is exactly what it’s for. But withdrawing more from your 401(k) earlier in retirement increases the risk that you run out of money. You’ll want to assess that risk to make sure you’re comfortable with this potential tradeoff.

You can do that by considering your withdrawal rate. Simply take the total amount you plan to withdraw from your 401(k) in a year and divide it by your account balance. In your case, you would divide $20,400 (1,700*12) by $750,000.

That’s 2.72%, which I would consider to be an incredibly low withdrawal rate. Assuming a consistent, inflation-adjusted withdrawal going forward and that your investments fall within a reasonable asset allocation range, the chance that you’ll run out of money is quite low.

If you’re planning to reduce your 401(k) withdrawals once your Social Security payments start, your risk will decrease even more. In fact, it’s possible that you’re being unnecessarily conservative and could consider withdrawing even more. However, you may be perfectly happy preserving your assets and I strongly believe that you should use your money in a way that suits you best. (A financial advisor can help you assess your risks in retirement and create an asset allocation designed to meet your needs.)

Next Steps

I can’t definitively say this is a good plan for you without knowing more about your situation, but delaying Social Security is often a smart choice and a 2.72% withdrawal rate is likely to work just fine for most retirees.

I also want to point out that nothing in my answer above speaks to whether or not this plan will provide you with enough income to cover your expenses in retirement. Since you mentioned your $1,500 pension payment, I assume you decided that $1,700 from your 401(k) each month would be enough to cover your expenses. If not, you’ll want to examine your expected expenses in retirement and assess whether $3,200 is enough to meet your spending needs.

Tips for Finding a Financial Advisor

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.

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