Is It Better to Take Social Security Early or Use Savings?

Deciding when to begin receiving Social Security benefits or drawing from personal savings is a significant financial decision for many approaching retirement. This choice profoundly influences financial security and lifestyle in later years. Understanding Social Security, retirement savings, and personal circumstances is fundamental to making an informed choice. This article explores these considerations.

Social Security Claiming Options and Their Impact

Social Security benefits provide a foundational income stream in retirement, but claiming age directly affects the monthly payment amount. The Social Security Administration (SSA) defines a Full Retirement Age (FRA), which depends on an individual’s birth year. For those born in 1960 or later, the FRA is 67. For individuals born between 1943 and 1959, the FRA falls between age 66 and 67.

Claiming Social Security benefits before your FRA results in a permanent reduction. For instance, if born in 1960 or later with an FRA of 67, claiming at age 62 reduces your monthly benefit by approximately 30%. This reduction occurs because benefits are lowered by a percentage for each month prior to FRA.

Conversely, delaying the start of Social Security benefits beyond your FRA can lead to a higher monthly payment. This increase comes in the form of delayed retirement credits (DRCs), which accrue until age 70. For individuals born in 1943 or later, these credits increase the monthly benefit by 8% for each full year benefits are delayed past FRA. For example, if your FRA is 67 and you delay claiming until age 70, your monthly benefit could be 24% higher than it would have been at FRA.

Delayed retirement credits cease accruing at age 70, offering no financial incentive to postpone claiming beyond this age. While delaying boosts your own payment, these credits do not increase spousal benefits.

Spousal benefits are typically calculated as a percentage of the primary worker’s full retirement age benefit, not their delayed benefit. A spouse can generally receive up to 50% of their partner’s full retirement age benefit. Claiming spousal benefits before your own FRA will also result in a reduction, similar to how individual benefits are reduced.

Survivor benefits, paid to eligible family members after a worker’s death, are also affected by claiming age. The benefit amount for a surviving spouse depends on their claiming age and the age at which the deceased worker started receiving benefits. Understanding these rules is essential because the decision to claim early or delay impacts not only the primary beneficiary but also potential benefits for a spouse or other dependents.

Strategies for Utilizing Retirement Savings

Retirement savings reside in various account types, each with distinct tax implications upon withdrawal. Common vehicles include 401(k)s, Traditional IRAs, Roth IRAs, and taxable brokerage accounts. Understanding their tax treatment is fundamental to effective retirement income planning.

Withdrawals from a Traditional 401(k) or Traditional IRA are taxed as ordinary income. The amount withdrawn is added to your taxable income and subject to your prevailing income tax rate. Contributions to these accounts are typically made with pre-tax dollars, allowing for tax-deferred growth until retirement.

Withdrawals from Traditional 401(k)s or Traditional IRAs before age 59½ are typically subject to a 10% early withdrawal penalty in addition to being taxed as ordinary income.

Roth IRAs and Roth 401(k)s operate differently. Contributions are made with after-tax dollars. Qualified withdrawals from Roth accounts are entirely tax-free and penalty-free. To be qualified, withdrawals must occur after age 59½ and after the account has been open for at least five years (the “five-year rule”).

If earnings are withdrawn from Roth accounts before meeting qualified distribution rules (e.g., before age 59½ or the five-year rule), they may be subject to ordinary income tax and a 10% penalty. However, Roth IRA contributions can always be withdrawn tax-free and penalty-free.

Taxable brokerage accounts hold investments where contributions are made with after-tax dollars. Investment gains, such as dividends and capital gains, are taxed when realized. When assets are sold, capital gains taxes apply to profits. Short-term capital gains (assets held for one year or less) are taxed at ordinary income rates, while long-term capital gains (assets held for more than one year) are taxed at preferential rates.

A sustainable withdrawal rate determines how much can be withdrawn from a retirement portfolio annually without depletion over a specified time horizon. The 4% rule, a common guideline, suggests withdrawing 4% of the initial portfolio value in the first year, adjusted annually for inflation. Recent studies suggest a sustainable rate might range from 3% to 4% or lower, depending on market conditions.

Savings longevity is significantly impacted by market performance and sequence of returns. Sequence of returns risk refers to negative market returns occurring early in retirement that can substantially deplete a portfolio, even if average returns over the entire retirement period are positive. If a portfolio experiences significant losses in the initial years of withdrawals, less capital remains to recover, potentially causing funds to run out sooner than anticipated.

Personal Circumstances Influencing Your Decision

The choice between taking Social Security early or utilizing personal savings is highly individualized, requiring a thorough assessment of various personal factors. Health and longevity expectations are key. If you anticipate living a long life, delaying Social Security to maximize the monthly payout (potentially by 24% or more by age 70) can offer greater cumulative benefits. For those with health concerns or a shorter life expectancy, claiming earlier might be more advantageous, ensuring a greater total amount received over a shorter period.

Current and future income needs also play a role. Individuals with other reliable income sources, such as pensions, part-time work, or rental income, may have the flexibility to delay Social Security. This additional income can cover living expenses while allowing benefits to grow. For those anticipating higher expenses or with limited other income, drawing on Social Security sooner might be necessary to meet immediate financial requirements.

Investment growth potential and personal risk tolerance are considerations. The guaranteed growth of delayed retirement credits from Social Security (an 8% annual return on deferred benefits for each year delayed past FRA until age 70) can be a compelling alternative to market investments. Those comfortable with market volatility might prefer to draw from their investment portfolio, hoping for higher returns, while allowing Social Security to maximize. Those with lower risk tolerance might find the guaranteed increase from delaying Social Security more appealing than relying on uncertain market returns.

Tax planning is another aspect. The timing of Social Security benefits and withdrawals from retirement accounts significantly affects overall tax liability. Social Security benefits can become taxable based on “provisional income,” which includes adjusted gross income, nontaxable interest, and half of your Social Security benefits. Strategic withdrawals from Roth accounts, which are tax-free, can help manage provisional income and potentially reduce the taxable portion of Social Security benefits.

Spousal and family considerations are also important, particularly in married households. A higher-earning spouse delaying Social Security benefits until age 70 can not only maximize their own monthly payment but also potentially increase the survivor benefit for the lower-earning spouse. The survivor benefit is generally based on the deceased worker’s benefit amount at the time of death or claiming. Maximizing the primary worker’s benefit can provide greater financial security for the surviving spouse.

Maintaining access to liquidity and emergency funds is paramount regardless of the Social Security claiming strategy. Unexpected expenses, such as medical emergencies or home repairs, can arise in retirement. A robust emergency fund (typically 6 to 12 months of essential expenses) prevents premature withdrawals from retirement accounts or early Social Security claims. Readily accessible funds provide a financial buffer, allowing individuals to navigate unforeseen events without disrupting their long-term plan or being forced to sell investments during market downturns.