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On paper, drawing down your 401(k) to delay Social Security benefits seems like a clever maneuver. After all, the monthly benefit check grows larger for every year that you manage to delay retirement.
However, there’s more to consider than just the size of the monthly payout. Here’s why you, and perhaps your financial advisor, should take a closer look at all the other variables that can impact your retirement income.
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A surprising impact
A simple calculation would have you believe that it’s best to delay collecting Social Security as long as possible.
After all, your monthly benefit checks can be roughly 30% higher if you wait until retirement instead of collecting at the earliest possible age of 62, according to the Social Security Administration.
However, this theoretical calculation is performed in a vacuum and doesn’t consider any other factors.
Surprisingly, for some people, taking Social Security early might actually be the best option. Your total payout from the day you retire until the end of life could be higher. On the other hand, drawing down on your 401(k) first could set you up for success later.
Here’s how to approach making this decision.
Read more: Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Consider all the factors
An often-overlooked yet critical factor in this equation is the opportunity cost of your 401(k) investments. Every dollar you withdraw from this account is one less dollar that could be compounding through the stock market.
For instance, over the past five years, the Vanguard S&P 500 ETF has delivered a compounded annual growth rate of 15.85%. In other words, if you invested in this ETF, you could have boosted your nest egg by roughly 34% in just under two years, outperforming the Social Security boost, which is capped.
Even if the stock market returns are significantly lower — say, about 5% compounded annually — your nest egg would be around 30% larger within five and a half years.
With Robinhood, you can invest in ETFs like the Vanguard S&P 500 to get a start on your nest egg. Robinhood has 24/7 support, and you won’t pay any commission fees on stocks, ETFs and options. Their platform also offers both a traditional IRA and a Roth IRA, so you can benefit from tax-efficient retirement investing.
New Robinhood customers can also get a free stock once you sign up and link your bank account to the app. You can pick your stock reward from top American companies, with amounts ranging from $5 to $200.
The other factor to consider here is that if stocks are in a deep bear market (meaning, they are underperforming) when you turn 62, it might not be the best time to sell. And if your assets are limited, drawing down for several years could leave you feeling squeezed before you ultimately decide to take benefits.
On the flip side, drawing down your 401(k) for monthly income might be easier if you have a sizable nest egg to rely on. And if you are still working in your mid-60s, drawing down your 401(k) might be a better move than taking Social Security benefits, which are subject to taxes.
There’s a lot of variables to consider, so the ultimate calculation depends on your personal preferences and financial situation.
Which choice is right for you?
For many retirees in good health with a long life expectancy, it’s often wiser to first draw down from a 401(k) — delaying Social Security payments to maximize guaranteed, inflation-adjusted income. Average life expectancy for U.S. adults is 78.4, according to the CDC, which means you’re statistically likely to enjoy seven or eight years collecting benefits if you wait until full retirement age.
This strategy offers more control over taxes and can reduce future required minimum distributions (RMDs). Typically, RMDs must take effect by 73 and set out the minimum annual withdrawal from your retirement account.
However, taking Social Security early might be better for those with health issues, immediate income needs or smaller retirement savings.
It’s worth speaking with a financial professional to make sure you’re considering all of these factors before drafting your long-term retirement plan. With FinancialAdvisor.net, you can find a trusted and qualified advisor to guide you every step of the way.
From a directory of thousands, FinancialAdvisor.net matches you with two to three vetted SEC/ FINRA qualified financial advisors that can offer personalized guidance to help you make the right choices, invest wisely and secure the best retirement possible for you.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.