Help! When Should I Tap My Retirement Accounts and Start Social Security?
Q: Could you give me some guidance about timing Social Security benefits and retirement account withdrawals? I'm age 62, single and still working. I have a 401(k) and a Roth retirement account. I'm getting conflicting advice.
A: Retirees and Baby Boomers are inundated with conflicting financial advice. There's an explosion of new retirement planning websites, software, and counselors — most charging a fee. Even worse, a great deal of the advice could be downright harmful. The best financial advice needs to be based on specifics. That includes your financial situation, age, health, retirement goals and a host of other issues, like your housing and long - term care needs. That's something for which you need a professional financial advisor. While that's outside the scope of this column, here are three things to consider:
- Don't claim Social Security too soon. Most people don't realize how much money they give up by claiming benefits at age 62. For example, consider a woman entitled to a monthly benefit of $1,500 at her full retirement age of 66. If she lives to 95 she would receive $780,952 over the course of her retirement. With cost-of-living adjustments (COLAs), her final benefit payment would be $3,216.
Compare that to retiring early at age 62. She'll lose $92,698 in Social Security income. Her starting benefit will be permanently reduced by 25% to $1,125, and even with receiving benefits over more years she'll receive only $688,254 over the course of her retirement. Her final benefit would be $2,605.
But if she delays until age 70, she'll receive $62,928 more because of the delayed retirement credit. Her starting benefit will be $1,980, she will receive $843,880 over her retirement, and her final benefit would be $3,842.
- Consider taxation costs when choosing which retirement account to tap first. The income thresholds that subject Social Security benefits to taxation are fixed and not indexed for inflation, meaning more retirees will pay more taxes on their Social Security in coming years. There are two income thresholds. Up to 50% of Social Security income is subject to taxation on income of $25,000 (individuals) or joint filers with incomes of $32,000. Up to 85% of Social Security income is taxable on income of $34,000 and up (individuals) and $44,000 (joint filers). Distributions from Roth accounts, however, don't subject your benefits to taxation.
- If you delay starting Social Security until 70, consider income from a traditional IRA or 401(k), especially if you stop working before then. It may be to your advantage to start taking distributions from your 401(k) and wait to tap your Roth once you start Social Security benefits. Roth IRAs are not subject to the required minimum distribution at age 70 rules that affect traditional IRAs. You are required to start distributions from 401(k) accounts at age 70 ½ or face a tax penalty of 50% on your required minimum distribution amount. Depending on your specific circumstances, you might be able to reduce your tax obligation by starting distributions at a younger age at a lower required minimum distribution and then tap the Roth in later years when you start Social Security.