Many baby boomers face the same dilemma as they approach retirement: during that “bridge” period between the time they retire and the time they reach full retirement age (at 66) or maximum retirement age (at 70), should they use the funds from their retirement account (401k or IRA), or start taking social security?
According to certified financial planner Frank Jaffe at Access Wealth Planning in Roseland, NJ, there is no right or wrong answer as every situation is different. Yet, in most cases, holding off on filing for social security often works out the best.
Taking social security near retirement
“Say, you stop working at age 62,” says Mr. Jaffe, who writes frequently on personal finance issues and hosted a popular radio show on the subject. “If you take social security at this time, you’re locked in at a permanent ‘real’ reduction of 25 percent. This gives you a smaller base on which cost of living adjustments will apply in the future.”
A monthly social security benefit of $750 if taken at this time, for example, would be increased to $1,000 if you waited until age 66 – and if you waited until 70, benefits would rise to $1,320.
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Compare that to withdrawing money from a 401(k). Say, you have $100,000 in your retirement account and will need to remove $10,000 every year between ages 62 and 66. This would reduce the account to $60,000 after year four. While this would certainly be painful, by drawing down your retirement account you would also reduce your future Required Minimum Distributions (RMDs), which need to be taken after age 70 ½. Having a large RMD can put you into a higher-tax-expected tax bracket (and result in your income from social security also being taxable).
Additionally, unlike with social security, which offers a higher guarantee for life, there is no guarantee with your retirement account (which may be affected by low interest rates).
This is certainly a question raised by many as they approach retirement age. Let me know if you would like to discuss this with Mr. Jaffe, or would be interested in having him write an article about the subject.