Carla Fried: Retiring early? Tap your 401(k), wait until 70 for Social Security | Business

February 21, 2021

For all the advice that working longer is one of the best ways to shore up your retirement plan, it isn’t always practical. Even before the pandemic recession, which hit older workers hard, unemployment and illness caused many workers within a decade or so of 65 to stop working earlier than planned.

If you’re considering retirement earlier than expected, you have the challenge of creating a steady income stream that can support you through what may be a 25- to 30-year retirement.

Quite often, people link when they retire with when they “should” start claiming Social Security. Yet, if you retire in your early 60s and start Social Security, you are leaving serious money on the table.

Stretch retirement savings

New research gives important guidance on how to stretch your retirement dollars the furthest: In your 60s, lean on withdrawals from your 401(k) and don’t start claiming Social Security. That is, use withdrawals from your 401(k) as a “bridge” during your 60s so you can afford to delay claiming Social Security until age 70.

While you can start claiming your Social Security retirement benefit at age 62, doing so locks in the minimum benefit you are entitled to. Waiting until age 70 to start entitles you the maximum benefit. And the gap is massive: Start at 62 and your benefit will be around 76% less than if you wait until age 70 to start.

There is no risk-free investment out there that hands you a guaranteed 76% return over eight years. Only Social Security delivers that in today’s world of limited income options. Yet fewer than 10% of retirees wait until age 70 to begin receiving their Social Security payout.

Plan for longevity

Unless you have a pre-existing condition that suggests a shorter-than-average life expectancy, waiting for that higher payout will more than pay off assuming you live into your mid 80s. (For the record, if you make it to 65, the odds are that you will indeed live at least that long.)

That might seem beside the point if you’re stopping work at 62 or 64 or 66, and need money to live on. You might be thinking you simply don’t have the luxury to wait to claim Social Security.

But if you have money saved in a 401(k), the wonks at the Center for Retirement Studies at Boston College (CRR) have crunched the numbers and found that many retirees will lock in a better long-term retirement income stream if they use a “Social Security Bridge strategy.”

Step 1: Don’t start Social Security in your 60s. Wait until age 70.

Step 2: Make withdrawals from your 401(k) that are equal to what your Social Security benefit would be if claiming at your “full retirement age.” Your FRA is somewhere between 66 and 67 for anyone born in 1943 or later. You can find yours at the Social Security website,

401(k) vs. Social Security

The CRR researchers created a model using household survey data from 2016 that showed 65-year-old single men who had 401(k) savings had a median account value of $106,000 and were eligible for an annual Social Security benefit around $15,400. Women with 401(k) savings had a median account value of $110,000 and were eligible for an annual Social Security payout of around $14,500.

They then calculated how withdrawing money from the 401(k), in place of drawing Social Security, compared to buying an immediate-income annuity or a deferred income annuity.

For the record: Both of these types of annuities are solid ways to generate guaranteed retirement income. But as the researchers note, even when they might be a smart strategy, retirees have shown little appetite for handing over a big chunk of their savings to an insurance company. Your Social Security benefit is in effect an annuity that you already own. The researchers set out to see how waiting for the optimal time to claim — age 70 — stacked up against the commercial annuities you could use to generate guaranteed retirement income.

The model factored in investment risk (for a diversified retirement portfolio), life expectancy, and the probability of later-life spending “shocks” (see: health care expenses).

For both a single man and woman, with median 401(k) wealth, drawing down a portion of their retirement savings as a “bridge” that allows them to delay claiming Social Security is the best way to go to generate optimal retirement income. The strategy is also smart for households with above-average 401(k) savings.

Full retirement age

If you register at the Social Security website you can get an estimate of your Social Security benefits if you were to claim at 62, at your full retirement age or at age 70. Then you can decide if you want to withdraw your FRA amount (or less) from your 401(k) so you wait to claim Social Security as long as possible.

Not sure about all the moving pieces? This is where hiring a fiduciary financial planner to work through the numbers with you can be a great investment. Plenty of planners will take on the assignment and charge an hourly or project fee. No need to enter into a long-term ongoing relationship if that’s not what you want.