This video discusses the question: should you draw on your 401(k) to delay Social Security? The video examines delaying Social Security under several different COLA and 401k return scenarios and then overlays life expectancy to ensure a holistic analysis. Most importantly, the video quantifies what happens when there is a change in the Cost of Living Adjustment or the 401k return.
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When it comes to retirement planning, many people wonder whether they should withdraw from their 401(k) to delay taking Social Security benefits. This decision isn’t an easy one, as it involves balancing different factors and understanding the long-term implications.
Firstly, it’s important to understand how the two retirement options work. A 401(k) plan is a retirement savings account offered by employers, where you can make contributions from your pre-tax income. This account grows tax-free over time, and you can start withdrawing from it penalty-free after the age of 59 and a half.
On the other hand, Social Security is a federal benefits program that provides retirees with a regular, steady income during their golden years. The amount of benefits you receive depends on factors such as your age, work history, and current income level. You can start receiving Social Security benefits as early as age 62, or you can delay them until age 70 to maximize your monthly payouts.
Now, let’s consider the argument for withdrawing from your 401(k) to delay Social Security. By doing so, you’ll have access to more money upfront to cover your living expenses and enjoy retirement without having to rely solely on Social Security. Additionally, if you wait until age 70 to start collecting Social Security benefits, your monthly payouts will be higher compared to taking them at age 62, thus providing you with more significant long-term financial security.
However, there are also some downsides to withdrawing from your 401(k) to delay Social Security. First, withdrawing from your 401(k) can result in taxes and penalties, which can eat into your retirement savings. Second, you’ll be reducing the size of your 401(k) and potentially impacting your long-term retirement security. Lastly, there’s uncertainty surrounding Social Security, and some experts believe that Social Security payouts could be reduced in the future.
In conclusion, the decision to withdraw from your 401(k) to delay Social Security ultimately depends on your individual goals, financial situation, and retirement plans. Before making any decisions, it’s important to consider all the factors and their long-term implications. Speaking with a financial advisor can help you better understand how the two retirement options can work together to provide you with financial security in your golden years.
I think an important variable to consider also is spousal SS benefit. The high earner, (husband or wife) should delay SS until 67 so the spousal benefit is maximized. If you take SS at 62 in line with Choice B you are reducing the eventual SS spousal benefit which is based on the high earner's benefit. Maybe run some numbers on Husband high earner pre-deceases the wife by 5 years. Now look at lifetime benefit of the spouse, far better with option A I would think.
Thank you for this detailed, thoughtful analysis. Best on the subject I’ve seen on this site,
HUGE risk: Republicans are constantly trying to take away our social security. If you deplete your 401K by age 70, you end up with nothing, if Republicans get their way.
It’s great to see projections, but this model assumes SS payments will increase annually. I took my SS at 62 due to the Fed stating in 2035 there will be a 25% reduction in SS benefit. Ugh, since my 401k got hammered I’m hoping in the next decade that will rebound and will draw from that to supplement my income. If I don’t get hit by a bus or something before that at least my family might benefit !,
It's important to consider the tax implications. I have the good fortune of having a pretty good Gov't pension after working in Engineering (a relatively higher salary occupation) for 3+ decades. So any 401k withdrawals or social security payments are going to be fully taxable on a Federal level & possibly partially or fully taxable at the State level, depending on what state you live in – I'm in a blue state, & am almost fully taxed due to income level. Social security payments are taxed at 85% max at the federal level, for me personally, 75% at the state level. 401k withdrawals would be taxed 100% at current income levels. So taking soc security edges out withdrawing from 401k by a hair for me. I have health issues too so am figuring on age 84 being optimistic (I'm 62 now, just started taking soc security).
@5:25 The age 70 starting payment is 77% higher”? WHAT?
why burn through money you earned and saved when you can collect social security and have more money to leave your family our use for other things.
Thanks for this breakdown. One factor you may be missing is what you leave behind when you die. If you take SS early and leave as much in the 401k as possible, that will go to your beneficiary when you die, whereas if you draw from that and take SS later, there's no real benefit to your survivors. Or am I missing something?
This is the best channel I have found so far. Not just opinions but a spreadsheet to show the data. The assumptions it's based on are really up to you to provide and it can give you a solid choice to start from.
For me I'm already retired from my job but I'm only 51 so deciding on when to take benefits is a long way off but it's never too early to start planning!
I guess the biggest negative for option B is you can't go back, once you take it you can't untake it. but with option A at any time between 62 and 70 you can decide to take SS. good for if there's a downturn in the market.
Is there a spreadsheet for this available somewhere?
So it's basically a wash which is really a good thing. This way depending on your situation you can go either way. So if you need to take SS sooner rather than later to say unlock a spousal benefit then you can go ahead and do that and not worry to much about the alternative scenario.
I only have about a year and a half to supplement my retirement income until i reach full retirement, the amount I need to cover that is about $46,000. This will result in an increase in my Social Security of about $600 a month.
Since it would take a little more than $100k in an annuity to generate $600 a month, so I will have accomplished that for less than half the cost of an annuity and to boot, Social Security is cost of living adjusted.
I wish I had seen this video when it was originally posted. Please take this in context, it appears flawed. The more time I spend on it, largely recreating it, the more I find I cant follow the logic. And it appears to heavily affect the outcome and thus the error. The easiest thing to see and the issue I cant seem to get over or figure out in the "income" simply look at age 69 and there are two problems the larger being isnt "Choice A" being shorted by $2,100 to influence the outcome, and 2) isn't both incomes to low?
Second the video seems to me to blend COLA(cost of living) and non-COLAs though I'm not sure because I cant follow the logic or recreate the sheet in a logical fashion. For an example of this look at the age 69 incomes and compare them to age 72, it simply makes no sense to me.
Third this is a low wage earner averaging around a $23,000/year salary and that makes a big difference. This person would likely take home about $20,000 so their social security actually can exceed their working income. Most of us dont have that situation I cant back calculate their actual return because it is pre FRA=67 but it is way different than a normal wage earner
BTW this person should strongly consider delaying until 66 years and 6 months thus retiring on a "real" income of very close to $20,400.
Why it matters: For most of us once work stops its best to draw social security, however that isn't always the case and everyone should check first. Typically preserving the IRA as much as possible leaves a future stream of income, which is gone if the IRA is cashed out early
I retired shortly before FRA and delayed starting SS until roughly FRA. I guess this would be option C. LOL. Sort of a middle of the road approach. I didn't feel comfortable waiting until 70. Family history made this seem the better choice.
A very good summary.
For me A seems better though I do not like the idea of depending on a government program which could/will change. Since I love my work and continually acquire additional marketable technical skills, I hope to work corporate for the next 12 years then move to consulting. Fate and real life may not support that though. I am almost 60 and love watching your videos so I have your input regarding backup plans. If people in their 80s can be president, surely it isn't a stretch to believe I can move to consulting in my early 70s. I am not overly enthusiastic about long trips during retirement or before, but I do plan on an Alaskan cruise and many staycations or day trips in my life. THANKS!
How can I get this spreadsheet?
By the way; thanks for acknowledging that if you delay taking Social Security you will need to withdraw from savings (which has an impact).
99% of everything I read or see on this analysis basis the decision only on how to extract the maximum money from Social Security and does not consider that you will need to draw from savings if you delay.
I think I can recreate your spreadsheet but I'm not clear on the FV calculation and the annuity calculation.
This is just looking at numbers. One major thing to bear in mind is SSN is for life and if you don’t use you lose it. 401k can be passed to your heirs .
This is good stuff and nicely presented. I wanted to recreate your spreadsheet here but I got stuck on the very first numbers – the calculation for the 2% COLA on Social Security – your worksheet shows it going from $1,200 per month to $1,286 per month – that is an increase larger than 2% – forgive me but I am missing something here?
plan as if you were living to a hundred
in one word….yes….
Say you retire at 59years old, and have 1 million in your 401k. No big bill, house paid off zero car payments. Would you delay? Or start drawing at 62?
You left out how taxes can affect this decision. It makes no sense to pay higher taxes on 401K distributions than you would've paid when you were working.