Maximizing Your Retirement Income: Using Your 401(k) To Delay Social Security And Boost Payments

For many Americans, a 401(k) forms the cornerstone of their retirement strategy, complementing Social Security benefits to create a stable income stream during their later years. Knowing how to coordinate these two sources of income can significantly enhance your financial situation in retirement. One critical decision involves choosing when to start receiving Social Security benefits. While you can begin collecting as early as age 62, postponing benefits until age 70 can result in substantially higher monthly payments.

How a 401(k) Can Help You Delay Social Security

A 2023 study by the Schwartz Center for Economic Policy Analysis explores how utilizing a "Social Security bridge" can mitigate the penalties of claiming benefits early for those with retirement savings. The study reveals that approximately 20% of eligible individuals start claiming Social Security before reaching full retirement age, with over 90% claiming before the maximum age of 70. This early claiming results in reduced monthly benefits. More than one-fifth of those eligible begin drawing benefits as early as age 62, leading to a 35% reduction in their payments.

The researchers advocate for a "bridge" strategy, where retirees use withdrawals from their retirement savings, such as a 401(k), to cover living expenses until they start claiming Social Security benefits at a later age. These withdrawals should roughly match the amount they receive from Social Security each month and continue until age 70 or until the retirement funds are exhausted. The study also suggests employers could implement a formalized "bridge" program using 401(k) funds to support this approach.

How Much Can You Increase Your Social Security By Delaying Benefits?

Retirees have the flexibility to decide when to start claiming Social Security benefits, but delaying them can lead to a significant increase in the monthly amount received. For example, waiting until age 70 to begin collecting benefits can increase monthly payments by an estimated 77% compared to starting at age 62. This means that by delaying, you will receive a substantially higher monthly payment for the rest of your life.

Determining How Much of Your 401(k) Is Needed to Delay Benefits

To determine how much of your 401(k) savings you might need to bridge the gap while delaying Social Security, consider your expected Social Security benefits and the time you plan to delay. Essentially, the "bridge" amount will depend on the monthly benefits you anticipate and the duration you need to supplement your income using your 401(k) funds before tapping into Social Security.

By carefully planning the use of your 401(k) and the timing of your Social Security benefits, you can maximize your retirement income and ensure a more financially secure future.