Using Your 401(k) to Delay Getting Social Security and Increase Payments

Although you can start collecting Social Security at age 62, you can get much higher monthly payments if you wait as long as age 70. However, many people want to (or must) retire before they reach 70. If you’re one of them, consider a possible strategy, backed by research, to use your retirement savings to put off receiving Social Security.

Build a 401(k) Social Security bridge

Research from the Schwartz Center for Economic Policy Analysis, published in 2023, analyzes how a Social Security bridge option can help reduce early-claiming penalties for individuals with retirement savings. According to the study, one-fifth of eligible people claim Social Security before their full retirement age, and over 90% claim before the maximum age of 70, resulting in reduced monthly benefits. They also found that more than one-fifth of eligible individuals claim their Social Security benefits as early as age 62, resulting in a 35% cut. 

The study recommends a “bridge” between retirement and collecting Social Security benefits, one where individuals cover living expenses through withdrawals from retirement savings instead of drawing from Social Security. These monthly withdrawals should be roughly equivalent to what they’d draw from Social Security on a monthly basis, and would continue until age 70 or until the money runs out. Researchers also propose a formalized “bridge” plan that employers could offer using 401(k) funds.

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But why tap those funds? 

The answer is that any chance to delay collecting Social Security benefits means you’ll receive a larger monthly check when you finally do start to draw benefits.

How much can you increase your Social Security by delaying benefits?

As a rule, retirees must decide for themselves when to begin claiming Social Security benefits.

If they can wait to collect, though, beneficiaries can increase the amount they receive every month by an estimated 77%. That’s the difference in monthly payments between people who start collecting Social Security at age 62 and starting at age 70. That means every month moving forward, your monthly payment will be that much higher if you wait to start receiving Social Security benefits than if you start as soon as you turn 62.

Social Security gives the following example to show how it works: If you turn 62 this year, your full retirement age is 67. If your monthly benefit at full retirement age is $1,000, but you start claiming at age 62, your monthly benefit will be reduced by 30% to $700 because you will have more years to receive benefits. But if you delay starting benefits until you turn 70, your monthly benefit would be $1,240. That’s a difference of $540 a month.

This example illustrates the proportionate effects of delaying benefits or starting them early. The amount an individual will receive is computed by Social Security based on the beneficiary’s average indexed monthly earnings going back as far as 35 years. According to Social Security, the average monthly retirement benefit as of January 2024 is $1,907. 

The maximum monthly Social Security benefit in 2024 is $3,822 for those who retire at full retirement age. That benefit is $2,710 for those who retire at 62 and $4,873 for those who wait to retire at 70. That’s a difference of $2,163 every month between those who retired at 62 and those who waited until 70.

Waiting eight years to start claiming benefits at 70 instead of 62 would mean forgoing 96 monthly payments. If you planned to retire at 67, you’d forgo 36 monthly payments. So the challenge is to pay the bills without collecting Social Security until turning 70.

That’s where the 401(k) bridge comes in. That money can be used to purchase income annuities or withdrawn regularly by the beneficiary to supplement Social Security benefits.

How much of my 401(k) is needed to delay benefits?

So how much money would you need to plan on spending from your 401(k) to make up for monthly benefits while you wait to start claiming Social Security? That, of course, depends on how much your benefits are expected to be and how long of a delay you plan on. You can find out your benefit projections online by creating an account with Social Security. Also, check out these 14 Social Security tasks you can do online as well.

The cost of the three years of monthly payments for someone projected to receive the maximum benefit and who waited until age 70 would be just $175,428, while the cost for eight years would be $467,808. This doesn’t include any cost of living adjustments. But again, this is the maximum amount that Social Security pays. Your amount would likely be lower. 

The cost of three years of average ($1,907) monthly payments is $68,652, while the cost of eight years of average payments is $183,072. If you can manage it, it could pay to delay. This is especially true if you’re healthy and expect to live a long life, collecting lots of monthly benefit payments.

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