Finance & Jobs, Social Security

Withdrawing from a 401(k) vs. Delaying Social Security


Withdrawing from a 401(k) while delaying Social Security benefits can be a strategic approach depending on individual financial needs, tax implications, and long-term retirement planning. Let’s break down the rules, pros and cons, and provide an example for someone withdrawing $2,000 per month from their 401(k) at age 65 compared to delaying Social Security until age 70.

Rules and Regulations:

  1. 401(k) Withdrawals:
    • You can start withdrawing from your 401(k) without penalty after age 59½.
    • Withdrawals are taxed as ordinary income.
    • Required Minimum Distributions (RMDs) begin at age 73 (starting in 2023), meaning you are required to take a certain amount of money out of your 401(k) each year whether you need it or not.
  2. Social Security:
    • You can claim Social Security as early as age 62, but benefits will be reduced.
    • Full Retirement Age (FRA) for most people is around 66–67.
    • Delaying Social Security beyond FRA increases benefits by 8% per year until age 70, when maximum benefits are reached.

Pros and Cons

Pros of Withdrawing from a 401(k) and Delaying Social Security:

  • Larger Social Security Benefit: By delaying Social Security, your benefit increases by 8% per year, up to age 70, providing higher guaranteed income for life.
  • Tax Planning: Withdrawing from your 401(k) first may allow you to manage your taxable income before RMDs kick in at age 73, especially if you are in a lower tax bracket now than you expect to be later.
  • Flexibility: You can decide how much to withdraw from your 401(k) based on your financial needs, giving you control over your income.

Cons of Withdrawing from a 401(k) and Delaying Social Security:

  • Market Risk: The value of your 401(k) may fluctuate based on market conditions, potentially impacting how long your savings will last.
  • Taxation: Withdrawals from your 401(k) are taxable as ordinary income, which could push you into a higher tax bracket if not managed carefully.
  • Depleting Retirement Savings: If you withdraw too much too soon, you could risk running out of money in your 401(k).

Example Calculation:

Assume someone turns 65 and wants to compare withdrawing $2,000 per month from their 401(k) vs waiting to claim Social Security at age 70.

Scenario 1: Withdraw $2,000 per month from 401(k) starting at 65.

  • Monthly Withdrawal: $2,000 from a 401(k)
  • Annual Withdrawal: $24,000
  • Taxes: Assume the person is in a 15% tax bracket. They would pay $3,600 in taxes annually, leaving them with $20,400 net after taxes ($1,700 per month).
  • Effect on 401(k): If their 401(k) balance is $400,000 and earns an average of 5% annual growth, withdrawing $24,000 per year will reduce the balance over time.

Scenario 2: Delay Social Security until age 70.

  • Full Retirement Age (66–67): Assume at FRA, the person is entitled to $2,000 per month in Social Security benefits.
  • Delayed Benefit Increase: By delaying until age 70, benefits increase by 8% per year. Over five years, benefits grow by 40%.
  • Monthly Benefit at 70: $2,800 (40% higher than $2,000).
  • Annual Benefit at 70: $33,600 (Social Security benefits are adjusted for inflation but are generally tax-favored compared to 401(k) withdrawals).

Comparison:

  • At Age 65 (401(k) Withdrawals):
    • Monthly net income: $1,700 after taxes.
    • Total net income over five years: $102,000.
  • At Age 70 (Social Security):
    • Monthly income: $2,800 (taxes apply but are typically lower than 401(k) withdrawals).
    • Lifetime income from Social Security will be higher if you live beyond your late 70s or early 80s due to the increased benefit.


 Withdrawing from a 401(k) while delaying Social Security can be beneficial if:

  • You need immediate income but want to maximize your Social Security benefits later.
  • You are comfortable managing withdrawals and taxes.
  • You have other sources of income or investments to complement your strategy.

However, it is crucial to consider your longevity, tax situation, and market conditions before making this decision. A financial advisor can help tailor this strategy to your specific needs.

-Phan Trần Hương-

Here are some references and sources you can consult for further reading on withdrawing from a 401(k) and delaying Social Security:

  1. Social Security Administration (SSA):
    • Detailed explanation on Social Security benefits, retirement age, and delayed retirement credits:
      Social Security Retirement Benefits
  2. Internal Revenue Service (IRS):
    • Guidelines on 401(k) withdrawals, required minimum distributions, and taxation:
      IRS 401(k) Resource Page
  3. Fidelity Investments:
    • Insight into retirement planning, including 401(k) management and Social Security timing strategies:
      Fidelity’s Retirement Insights
  4. The Balance:
  5. Investopedia:

These resources provide a deeper understanding of the topics discussed, helping you make more informed decisions.