Should You Draw Your 401(k) to Delay Social Security?

in this video we examine the question should you draw on your 401k to delay taking social security coming up next on holy schmidt holy schmidt retirement can be overwhelming and there are a lot of questions that come up in retirement that need answers one of the most frequently asked questions here on the site is should i delay taking social security and fund that by drawing down on my 401k well that's a big question and to answer this question we need to make some assumptions change the assumptions and you change the outcome of the analysis at the end of this video i will show you what happens to the outcome if you tweak some of these assumptions the first assumption we're going to make is that your social security payment is 1200 per month that's the average social security payment of a 62 year old in 2022 anyway that comes to thousand four hundred dollars per year if you wait until age seventy to draw social security that amount goes up to twenty five thousand five hundred and nine dollars it will be higher when you get to age 70 of course because when you get to age 70 that number will be inflation adjusted assumption number three is that we live to age 84. so 22 years from age 62. this is realistic because the mortality tables tell us that the average person at age 62 lives between age 82 and 84 depending on their gender you have two choices in front of you choice a which is taking your 401k and using that to pay your way forward and in this case we're going to assume 14 400 per year between ages 62 and age 70 while you hold off taking social security until age 70. then you draw social security at age 70 25 509 per year any remaining balance on your 401k gets amortized over the rest of your life choice b is that you draw on social security immediately and use your 401k as a filler throughout the rest of your life for simplicity your 401k has a balance of 93 075 dollars that is 14 400 per year for eight years at a five percent annual return but and this is important it could be any amount over ninety three thousand seventy five dollars because that difference or that excess would go to either plan a or plan b as a amortized payment equal in both scenarios finally we need to talk about the returns we assume a five percent return with your 401k and a cost of living adjustment of two percent per annum on average for the rest of your life the cola adjustment might seem a little conservative now given that last year's cola adjustment was 5.9 percent but on average it has been around 2 percent so what happens in choice a you take 14 400 per year from your 401k and your 401k continues to accumulate 5 returns on the remaining balance at age 70 your 401k has depleted but you have not drawn on your social security yet at age 70 you would get the inflation-adjusted payment for social security your twenty five thousand five hundred nine dollars becomes twenty nine thousand eight hundred eighty eight dollars assuming the two percent cost of living adjustment continues at age 84 the payment would be 39 436 dollars choice b you draw on social security immediately fourteen thousand four hundred dollars starting at age sixty two your fourteen thousand four hundred dollars would adjust with inflation bringing your age seventy total to sixteen thousand five hundred forty one dollars the ninety three thousand seventy five dollars that you did not use would continue to grow at five percent and would grow to thousand 137 hundred fourteen dollars using an annuity type of payment stream for your 401k your payment would be thirteen thousand eight hundred ninety two dollars per year plus your cost of living adjusted social security payment now in a moment i'm going to show you the winner choice a or choice b but stick around after i tell you the winner because i'm going to show you what can go wrong and there is a lot that can go wrong if your assumptions change and understanding what happens when the variables change is far more important than whether we come up with choice a or choice b so the total payments with option a using your 401 k early in taking social security late was 632 three dollars the total payments in option b drawing on social security immediately and using your 401k later came out to be six hundred twenty three thousand seven hundred fifty one dollars option a wins now you can see that they were close less than ten thousand dollars apart here's what would make option a a worse outcome if the cost of living adjustment wasn't two percent it was 1.5 percent then option a would come out at five hundred ninety four thousand five hundred seventy three dollars and option b would equal six hundred thousand four hundred twenty five dollars the lower the cola the lower the annual adjustments are to either the payment if you start at age 62 or the payment if you start at age 70. since the age 70 starting payment is 77 percent higher than the age 62 starting payment a reduction in cost of living adjustment will have a bigger impact on the bigger number next if 401k returns are not five percent but higher let's say six percent then option b is the clear winner conversely if 401k returns are less than five percent then option b looks even worse finally if you live past the age of 84 option a is the clear winner conversely if you live much less than age 84 option b starts to look better and better the shorter your life expectancy if you'd like to see the schedules and charts around this information go to dot holysmith.com forward slash ss4 it's important to note that there are no perfect answers to this problem only directional answers market returns and cost of living adjustments are out of our control longevity is a little more in our control with diet and exercise but even that becomes harder to predict as you get older in all instances my recommendation is to plan like you're going to live to be 100 and live life to its fullest if you like this video and you want to see more of me please make sure you click subscribe and turn on notifications below i post about twice a week this is jeff schmidt thanks for watching

Channel: Holy Schmidt!

Views: 279,061

Keywords: collect early vs delay social security, social security, retirement planning, financial planning, social security benefits, 401k vs social security, should I use my 401k to delay social security, 401k to delay social security, use 401k to delay social security, use 401k to delay social security

Id: Bmy6pMHdL0Q

Length: 6min 43sec (403 seconds)

Published: Sun Mar 06 2022