When Robert Allan meets with clients of his investment management firm to plan their retirement, he begins with their goals and works backward. “The idea is that we want this much income per month and how are we going to get there,” says Allan, managing director of Welon Partners in Montgomery, Alabama.
One relatively novel approach he advises: drawing from a 401(k) while delaying claiming Social Security, as the monthly benefit increases the longer people put off taking it.
The strategy of using a 401(k) as a bridge to Social Security is getting increasing attention among people who have enough saved up in that type of account to tide them over until they’re 70, when they can claim the maximum Social Security payout. Even so, some are still reluctant to tap into what they see as a long-term nest egg and use it in the short term.
This makes conversations with advisers like Allan part math, part therapy.
“Running out of money is probably the biggest fear for most retirees,” he notes. “The question becomes, ‘How do I make this last?’ ”
It pays to wait
In fact, using a 401(k) first and putting off claiming Social Security means that the benefit payments will be higher. Plus, unlike 401(k)s and most other retirement accounts, Social Security can’t run out.
Waiting to claim Social Security until the maximum age of 70, rather than the earliest eligibility of 62, increases the monthly benefit by at least 76 percent, or about 8 percent per year. Given that people near retirement are generally advised to be more conservative about risk, that’s more than their investment accounts, including 401(k)s, are likely to earn during that time. And Social Security isn’t subject to sudden downturns in the market. “Social Security pays out for the rest of your life,” Allan says. “That’s all the more reason to avoid taking it early” and being locked in to the lowest payout.
Slow to catch on
But the idea of the 401(k) bridge has been slow to catch on, even among the large number of people who decided during the pandemic to retire early. One reason is that it’s so new; the generation for which the 401(k) replaced the pension that most workers once enjoyed but barely 1 in 5 still get is only now entering retirement, according to the Economic Policy Institute. Retirement account savings overtook pension fund assets in 2012, the institute reports.
“The baby boomers are the first generation to structure their retirement savings around 401(k)s, and many of them are just beginning to retire,” says Katie Kavehrad, a wealth adviser-planner at Paradigm Wealth Partners in Knoxville, Tennessee.