Is it a feasible plan to use my 401(k) during the eight years between retirement (age 62) and the maximum Social Security withdrawal age (age 70)? I have about $750,000 and I plan to take about $1,700 a month. I already have a pension of approximately € 1,500 per month.
–Lynne
Waiting to file for Social Security to take advantage of the deferred credits is a good strategy for those who want to maximize their benefits. If you retire before claiming your benefits, you’ll need a source of income to bridge the gap between when your paychecks stop and when your Social Security benefits begin.
If you have sufficient funds, then withdrawing your savings is a perfectly viable option to consider. However, that doesn’t necessarily mean it’s the best choice for you. There are often multiple ways to achieve a goal and you should take your own preferences and concerns into account. (And if you need more help with important financial decisions after retirement, consider working with a financial advisor.)
Insight into deferred social security credits
As you know, your Social Security checks will be larger the longer you wait to claim them, up to age 70. The downside is that they are worth less if you claim them before you reach your full retirement age (FRA).
If you were born in 1960 or later, you will receive your full benefit at age 67. If you file for Social Security before you reach FRA, your benefits will be reduced by a certain percentage each month before you turn 67, up to a maximum reduction of 30% at age 62. However, each month you wait increases your final benefit to a maximum of 24% at age 70.
To illustrate the difference, let’s assume that your benefit at age 67 is €2,000 per month. If you choose to claim your benefits at age 62, you will only receive €1,400 per month (30% less). On the other hand, waiting until age 70 will increase your payment to $2,480 per month. That’s a big difference and it often makes sense to wait. (And if you need more help with Social Security planning, consider consulting a financial advisor.)
Bridging the Gap with 401(k) Withdrawals
Of course, if you retire at age 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 you need. it’s for. But if you retire early, you increase the risk of running out of money. You’ll want to assess that risk to make sure you’re comfortable with this potential trade-off.
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 divide €20,400 (1,700*12) by €750,000.
That’s 2.72%, which I would consider an incredibly low withdrawal rate. Assuming there is consistent inflation-adjusted withdrawal going forward and your investments are within a reasonable asset allocation range, the chances of you running out of money are quite slim.
If you plan to reduce your 401(k) withdrawals once your Social Security payments start, your risk will decrease even further. You may even be unnecessarily conservative and consider withdrawing even more money. However, you may be completely satisfied with keeping 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 retirement risks and create an asset allocation tailored to 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 will probably work just fine for most retirees.
I would also like to point out that nothing in my answer above says whether or not this plan will provide you with enough income to cover your expenses during your retirement. Since you mentioned your retirement payment of $1,500, 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
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Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing 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.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would 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 SmartAsset AMP platform, is not an employee of SmartAsset, and has received compensation for this article.
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