Ask an Advisor: Should I Claim Social Security at 62 or Tap My 401(k) First?

Is it smarter to take Social Security at age 62 or withdraw from your 401(k)? I’m going to need some monthly income on top of my pension.

– Robert

Deciding when to begin collecting Social Security is one of the biggest financial decisions you’ll make in your life. Unfortunately, the Social Security claiming decision is quite complex and involves a lot of different variables. 

Delaying Social Security can increase your monthly benefit, which may make waiting attractive for some retirees. Without knowing your financial situation, I cannot give you a definitive answer on which option is best for you. However, I’d like to lay out why you may want to delay Social Security, as well as when claiming at age 62 may make sense.

If you need help with your retirement plan, consider speaking with a financial advisor. Connect with an advisor for free. 

The Financial Reason for Delaying Social Security

I generally recommend that people wait to claim Social Security because doing so can permanently increase their monthly benefit. In technical terms, these are called Delayed Retirement Credits (DRCs).

Assuming you were born after 1960, you are entitled to your full (unreduced) benefit at age 67. However, your monthly benefit increases for each month you delay claiming beyond age 67, up until the month you turn 70. If you wait until age 70, your monthly benefit will be 24% larger than what it would have been at age 67.

For example, consider a scenario where your full monthly benefit at age 67 is $2,000:

When to Consider Delaying Social Security

There’s obviously a trade-off to delaying Social Security, but there are some personal reasons that may make waiting attractive.

Longevity Is on Your Side

None of us know how long we’ll live, so there is a lot of projection and uncertainty when calculating longevity. Nonetheless, the strategy of delaying Social Security is most attractive to individuals who expect to live into their mid-80s or later.  

If you live into your mid-80s, you may reach the break-even point at which the larger monthly benefits from waiting until 70 make up for the payments you passed up by delaying. 

Ample Retirement Assets

If you have fully retired and plan on delaying Social Security, then you’re likely funding the early years of your retirement entirely with your own investments.

You should compare the amount you’ll need to withdraw each year to the total balance of your investments. This is known as your withdrawal rate.

A withdrawal rate below 5% to 6% may indicate that retirement assets are being drawn down at a relatively sustainable pace. In those cases, some retirees may have more flexibility to delay Social Security without relying as heavily on benefits for near-term income.

(And if you need additional help deciding whether to delay Social Security, consider working with a financial advisor.)

You’re Married, and the Higher Earner

The claiming decision gets exponentially more complex if you’re married. Ultimately, it will depend on the earnings history of both you and your spouse, although it’s generally more advantageous for the person with the higher projected Social Security benefit to delay claiming for as long as possible.

The reason for delaying has to do with what’s called survivor benefits. The spouse with the lower Social Security benefit “steps up” to the higher benefit amount if the higher-earner spouse dies first. The higher-earning spouse’s decision to delay can provide protection for the lower-earning spouse.

The Financial Ramifications of Claiming Social Security Early

The flip side of increasing your monthly benefit by delaying Social Security is that claiming before your Full Retirement Age (FRA) results in a permanently reduced monthly benefit. 

If you decide to take Social Security at age 62, then your monthly benefit would be 30% lower than your benefit at age 67 (again, assuming you’ll reach FRA at 67).

Here’s a breakdown of what a $2,000 benefit at FRA would look like if claimed early:

Reasons to Claim Social Security Early

For some retirees, claiming Social Security early can be costly over the long run. However, there are circumstances in which claiming early may be appropriate. 

Poor Health

Just as projected longevity is a reason to delay Social Security, poor health may be a reason to consider taking Social Security early. The logic is pretty straightforward: with a shorter life expectancy, collecting benefits sooner may provide more years of payments than waiting for a larger monthly benefit.

You Have a Financial Need

If you feel financially strapped at retirement and don’t have the nest egg to meet your needs, then claiming Social Security may be necessary to make ends meet.

You’re Younger Than Your Spouse

If your spouse is five to 10 years older than you and has a larger monthly benefit, that age difference may factor into when you decide to claim Social Security. For example, you could choose to collect your own retirement benefit first and later become eligible for a survivor benefit based on your spouse’s earnings record. Just keep in mind that the amount of the survivor benefit can depend on when it’s claimed, so both spouses’ ages and benefit amounts should be taken into account.

(And if you need help finding a financial advisor to guide you through this decision, this matching tool can connect you with one for free.)

Parting Thoughts

The decision to begin taking Social Security at 62 or to take withdrawals from your 401(k) involves analyzing many different financial and personal variables. However, retirees who have sufficient assets to cover their income needs and expect a longer retirement may have more flexibility to delay Social Security in exchange for a larger monthly benefit.

I would highly recommend you work with a qualified financial advisor to walk you through potential Social Security claiming strategies. After claiming your Social Security benefit, you have up to 12 months to withdraw the claim and pay back any benefits received. After 12 months, the decision cannot be reversed, so you want to make sure you get it right the first time.

Social Security Planning Tips

• A financial advisor can help evaluate different claiming strategies alongside retirement savings to determine how Social Security fits into an overall retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• SmartAsset’s Social Security calculator can help estimate how much Social Security income you may receive and provide a starting point for incorporating those benefits into a broader retirement income plan.

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