I Have $1 Million in Savings and a Pension. Should I Delay Social Security and Rely on My 401(k) for Eight Years?

A man is considering delaying Social Security past his full retirement age to increase his future benefits.

If you have $1 million in a 401(k) account and receive a pension, you may be able to defer Social Security until age 70. This can increase your monthly benefit by up to 24%. However, delaying Social Security means you’ll rely more heavily on your savings for several years and may have to withdraw a large portion of your nest egg. So is the compromise worth it? A financial advisor can review income sources and expenses and help you plan for a comfortable retirement.

Basics of pension payment

Funding your retirement is about having enough income to cover your expenses. You may be ready to retire when your retirement income equals or exceeds your expected expenses.

For most people, Social Security’s secure lifetime benefits provide an important source of retirement income. Additional income can come from pensions, retirement accounts such as 401(k)s and IRAs, rental income from investment properties, and part-time work.

On the spending side, key expenses include housing, food and healthcare. Most people also have discretionary spending on transportation, entertainment, recreation, education, and travel.

People with sufficient savings can afford to delay taking Social Security and use their nest egg to cover living and recreational expenses. While delaying Social Security can increase your future benefits, it also means your savings will be depleted more quickly. When making this decision, you need to consider all your sources of income as well as factors such as taxes, market fluctuations and inflation.

Social Security Delay: The 8% Annual Increase

Your benefit increases by about 8% each year if you delay taking Social Security past your full retirement age – until age 70. So if you wait, you will receive a significantly higher income later. However, if you claim your benefits before reaching full retirement age, you will receive less.

For example, if your benefit is $2,000 per month at full retirement age, claiming at age 62 would reduce that by 30%, leaving you with just $1,400 per month. On the other hand, if you wait until age 70, your monthly check would increase to about $2,480 per month – a 24% increase.

Financial advisers say it probably makes sense for many retirees to delay taking Social Security as well if they have other sources of income.

“The longer you can delay taking Social Security, the better, because your benefit will increase by 8% annually,” said Jeremy Suschak, certified financial planner (CFP) and director of business development at DBR & Co. in Pittsburgh. “Delaying also makes sense if expenses are low, debts have been paid off and assets can reasonably cover the expenses.”

Additionally, holding assets in diversified retirement accounts offers numerous benefits, says Hao Dang, an accredited investment fiduciary (AIF) and investment strategist at Consilio Wealth Advisors in Seattle.

“The location of assets is important for tax, legal and diversification reasons,” Dang said.

“While most distributions from these accounts are considered taxable income, the allowable age for penalty-free distributions may vary. The age 55 rule for 401(k)s allows penalty-free withdrawals when you are no longer at work. IRAs.” are limited to age 59½ or older.”

Speak to a financial advisor today to create a plan for retirement.

Example: $1 million saver delaying Social Security for 8 years

A woman reviews her 401(k) and considers the best time to claim Social Security benefits.

While filing later will significantly increase Social Security, deciding whether or not to delay filing will require figuring out how you’ll pay your bills in the meantime. Consider a 62-year-old with projected retirement costs of $5,000 per month. Like you, he has $1 million in retirement savings, earning a 5% annual return.

He also has a pension of $700 per month or $8,400 annually. This is about the same as the average retirement benefit, according to a 2022 Census Bureau analysis of income sources for older households.

If he collects Social Security at age 62, his monthly benefits of $1,400 and his monthly retirement income of $700 add up to $2,100. With monthly expenses of $5,000, he will need to withdraw $2,900 from his retirement account each month. And with inflation, this deprivation will increase over time to maintain the same lifestyle. Along the way, he loses about $25,000 of his savings waiting for Social Security—money that otherwise could have generated long-term investment returns.

But if he delays taking Social Security until age 70, he’ll have to withdraw $4,300 from his 401(k) account for eight years, which would reduce his balance to just over $800,000 by age 70. At this point he will start collecting social security.

A financial advisor can help you understand the pros and cons of your options.

Limitations: Inflation, market returns and longevity

Deciding when to claim Social Security involves dealing with uncertainty. A big risk is that your investment returns will fall short of your assumptions, meaning you either have to withdraw less or accept that your money won’t last as long as you expected.

Another possibility: Inflation could exceed long-term forecasts and force you to spend more money to maintain your standard of living. Living longer than expected now comes with its own risks. A longer lifespan means more retirement years need to be financed.

Call to delay social security

A woman weighs whether she wants to claim Social Security at age 62 or delay it for several years.

If you have significant retirement savings and a pension, it may be worth delaying your Social Security benefit. But first, make sure you can afford to fund your expenses from savings. Create a retirement budget that takes into account all sources of income. Check whether you can cover your spending needs for several years through savings alone.

Next, calculate the increased Social Security benefit due to the delay. Evaluate whether the recovery is worth shrinking your savings for a few years. Finally, consider other factors like spousal benefits, taxes, and unknowns like inflation, market volatility, and longevity. Speak with a financial advisor today to create a plan to minimize your taxes and protect your wealth.

Social Security Planning Tips

If you’re not sure when is the right time to claim Social Security, first estimate what your benefits would be at different ages. SmartAsset’s Social Security Calculator can help you project your benefits based on your income and the age at which you want to start collecting.

A financial advisor can help you plan for your social security. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three verified financial advisors working in your region, and you can have a free discovery call with your matching advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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