With $1 million saved and a pension, should I tap into my 401(k) and collect Social Security?

If you have $1 million in a 401(k) and get a pension, you may be able to delay taking Social Security until age 70. If you do this, you can increase your monthly benefit by up to 24%. However, delaying Social Security will mean you’ll have to rely more on your savings for a few years and potentially take a big bite out of your nest egg. So is it worth the trade-off? A financial advisor can review your sources of income and expenses and help you budget for a comfortable retirement.

Pension Payout Basics

Funding your retirement means having enough income to cover your expenses. You may be ready to retire when your retirement income matches or exceeds your anticipated expenses.

For most people, guaranteed lifetime Social Security benefits are a critical source of retirement income. Additional income can come from pensions, retirement accounts such as 401(k)s and IRAs, rental income from investment properties, and part-time work.

In terms of expenses, the essentials include housing, food and health care. Most people also have discretionary expenses such as transportation, entertainment, recreation, education, and travel.

People with enough savings can afford to delay Social Security and use their nest egg to cover living expenses and discretionary spending. While delaying Social Security can increase potential benefits, it also means draining your savings faster. Making this decision will require you to consider all your sources of income, as well as factors such as taxes, market fluctuations and inflation.

Social Security Delay: 8% Annual Growth.

Your benefit increases by about 8% annually for each year you delay Social Security beyond full retirement age – until age 70. So waiting provides a significantly higher income later. On the other hand, if you claim your benefits before you reach full retirement age, you will receive less.

For example, if your benefit is $2,000 per month at full retirement age, claiming at age 62 would reduce the value by 30%, leaving you with just $1,400 per month. Waiting until age 70, on the other hand, would increase your monthly check to about $2,480 a month — a 24 percent increase.

Financial advisers say it probably makes sense for many retirees to similarly delay participating in Social Security if they have other sources of income.

“The longer you can delay Social Security, the better, because your benefit will grow 8 percent annually,” said Jeremy Suschak, certified financial planner (CFP) and head of business development at DBR & Co. from Pittsburgh. “Deferral also makes sense if expenses are low, liabilities are paid and assets can reasonably cover expenses.”

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Plus, holding assets in diversified retirement accounts has multiple advantages, says Hao Dang, an accredited investment fiduciary (AIF) and investment strategist at Consilio Wealth Advisors in Seattle.

“Asset location is important for tax, legal and diversification reasons,” Dang said.

“Although most distributions from these accounts qualify as taxable income, the qualifying age of penalty-free distributions can be different. Rule 55 for 401(k)s allows penalty-free withdrawals if you are no longer employed. IRAs are limited to 59 ½ or older.”

Talk to a financial advisor today to make a retirement plan.

Example: $1 million saver deferring Social Security for 8 years

While claiming later increases your Social Security significantly, deciding whether or not to delay claiming requires figuring out how you’ll pay your bills in the meantime. Consider a 62-year-old man with anticipated retirement expenses of $5,000 per month. Like you, he has $1 million in retirement savings earning a 5% annual return.

He also has a pension that provides $700 monthly or $8,400 annually. That’s roughly the average retirement benefit, according to a 2022 Census Bureau analysis of older sources of household income.

If he takes Social Security at age 62, his monthly benefit of $1,400 plus his monthly pension income of $700 will add up to $2,100. With $5,000 in expenses each month, he will need to withdraw $2,900 per month from his retirement account. And with inflation, that withdrawal will increase over time to maintain the same lifestyle. With this route, he loses about $25,000 of his savings waiting for Social Security — money that could have otherwise generated long-term investment returns.

But if he delays Social Security until age 70, he’ll have to withdraw $4,300 from his 401(k) over eight years, which would reduce his balance to just over $800,000 by age 70. At that point, Social Security collection will begin.

A financial advisor can help you understand the pros and cons of your options.

Limitations: Inflation, market returns and longevity

Deciding when to claim Social Security involves taking uncertainty into account. A big risk is that the return on your investment won’t match your assumptions, meaning you’ll either have to withdraw less or accept that your money won’t last as long as you anticipated.

Another possibility: Inflation could exceed long-term projections, requiring you to spend more money to maintain your standard of living. Meanwhile, living longer than expected has its own set of risks. A longer lifespan means more retirement years to fund.

The appeal regarding the postponement of social security

If you have substantial retirement savings and a pension, delaying Social Security can pay off. But first, make sure you can afford to finance the expenses from your savings. Create a retirement budget accounting for all sources of income. See if you can meet your spending needs on savings alone for a few years.

Next, calculate the increased Social Security benefit from the delay. Weigh whether the boost is worth cutting into your savings for a few years. Finally, consider other factors such as spousal benefits, taxes and unknowns such as inflation, market volatility and longevity. To make a plan to minimize your taxes and protect your wealth, talk to a financial advisor today.

Social Security Planning Tips

• If you’re not sure when the right time to claim Social Security is, start by estimating how much your benefits would be at different ages. SmartAsset’s Social Security Calculator can help you project your benefits based on your income and the age you plan to start collecting.

• A financial advisor can help you plan for Social Security. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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