As individuals approach retirement, one of the most common and complex decisions they face is whether to begin claiming Social Security benefits immediately or delay them for a larger monthly payment later. This choice is not simply about timing; it involves balancing immediate financial needs with long-term planning.
Delaying Social Security can significantly increase your future benefit, but it may require withdrawing from other savings, such as a 401(k), to cover expenses in the meantime. Understanding whether this strategy is worth pursuing requires careful consideration of various factors, including health, life expectancy, and the stability of your financial resources.
The Case for Delaying Social Security
When approaching full retirement age (FRA), individuals are faced with the decision to either claim Social Security or defer it for a larger benefit later. Delaying Social Security beyond FRA increases monthly payments by roughly 8% annually until the age of 70, according to Trevor Houston, CEO of ClearPath Wealth Strategies.
This increase can be viewed as an annual “salary boost,” offering a more substantial income stream in the future. However, the strategy’s success depends largely on your financial resources, especially if you choose to delay in order to maximize your future benefit.
If you have sufficient savings or investments, such as a 401(k), and are in good health, waiting may be a prudent decision. By relying on your savings, you can increase your monthly benefit substantially once you begin claiming Social Security.
However, if your health is uncertain or if you expect a shorter lifespan, the logic behind waiting may be less convincing, making early Social Security claims a safer bet.
Risks of Early 401(k) Withdrawals
Despite the potential benefits of waiting for larger Social Security payments, many retirees may struggle with the financial burden of withdrawing from their 401(k) before claiming Social Security.
As Houston points out, taking withdrawals too early can deplete your savings, especially if market conditions decline or if you face unexpected expenses in retirement. This risk, known as “sequence risk,” can disrupt your long-term retirement plan, potentially leaving you with insufficient funds later in life.
While withdrawing from your 401(k) to delay Social Security can work if you have substantial savings, it can push you into a higher tax bracket, depending on the amount you withdraw. As 401(k) withdrawals are taxed as ordinary income, large sums can result in significant tax liabilities, diminishing the effectiveness of this strategy.
In fact, a Vanguard report from 2024 found that the average 401(k) balance for those aged 65 and older is $272,588. However, this figure is often skewed by higher earners, with the median balance standing much lower at $88,488. These numbers underscore the importance of careful financial planning to ensure that early 401(k) withdrawals do not compromise your future security.
Ultimately, whether delaying Social Security and withdrawing from your 401(k) is a smart choice will depend on your specific financial situation, health, and life expectancy. As Houston advises, consulting with a financial professional is key to determining the best course of action.
