Dear MarketWatch,
I am 64. I retired at 63 to take care of my grandchildren. My husband is 65 and plans to retire at 66.
Together, we have $1.7 million in our 401(k) plans and $300,000 in cash and stocks. Our house is valued at $900,000 and is paid off.
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If my husband takes Social Security benefits at age 66 and 8 months, when he reaches full retirement age, he will receive $3,600, and if I take them at age 64.5, I will receive $1,600.
Should we wait longer to collect Social Security benefits and live off our 401(k) plans for two years?
The babysitter
Related: My wife and I are nearing retirement and own $4 million worth of real estate. Should we sell our properties and invest the money?
Dear babysitter,
Congratulations on saving so much for your retirement. You are already reaping the benefits of being able to retire early and help take care of your grandchildren.
For many people, taking Social Security benefits early is often an easy decision because they need the money. That doesn’t seem to be the case here: They have solid 401(k) balances, savings outside of retirement plans, and one of the biggest expenses in retirement — housing — is paid off.
You may be desperate to claim benefits, but if you can wait, you’ll get more money. If you both wait until full retirement age first, you’ll get what you’re entitled to for all the years you’ve paid into the system.
But it might help you wait even longer if you and your husband can work out a plan for the next six years. For every year you delay taking Social Security past your full retirement age, you’ll receive about 8% until age 70.
Spouses can also benefit from delaying Social Security. Spousal benefits, which you receive when both spouses are alive, are capped at 50% of the FRA (so there’s no point waiting longer to try to get more money), but widow/widower benefits are 100% of the benefit the other spouse received, and that includes those deferred credits.
“If you earn delayed retirement credits during your lifetime, we will calculate benefits for your surviving spouse or divorced spouse based on your regular primary insurance amount plus the amount of those delayed retirement credits,” the Social Security Administration’s statement said. If your pension includes extra money because of your delay, the surviving spouse will receive that money after the other person dies.
If you are both financially well off, it can’t hurt to consider the estate planning aspects of applying for Social Security benefits.
Not everyone can wait to receive benefits, even if they are financially able to do so. Life expectancy and health should also be taken into account when deciding whether to apply. If you do not expect to live long, it is better to receive the money sooner rather than later so that you can benefit from the years you have paid into the system.
You should also consider how much money you’ll need in retirement and what impact that will have on your 401(k) balances. A rough guideline in the industry is the 4% rule, where you take out 4% of the balance in the first year and then factor in inflation after that. Some say the rule is a bit outdated and retirees can take out even less and still make ends meet in retirement, but regardless, you can use it to get an idea of where you stand. For example, 4% of $1.7 million is $68,000 — would that be enough for you in the first year of retirement? Or how much more or less would you need? If it a lot more, then you may want to apply for Social Security benefits to offset the drain on your retirement account, but if it’s less, that would be a sign you could wait.
You also don’t have to start collecting Social Security benefits at the same time. If his benefit is higher than yours, you can take yours first and let his benefit grow over time until you reach full retirement age or even beyond. You have options.
Whatever you do, be happy that you can make these decisions on your own. It’s a great privilege – as is the time you get to spend with the kids!