Should You Draw Down Your Portfolio to Delay Social Security?

When people talk about social security benefits and retirement planning, they often say, “My goal is to wait as long as possible deferring social security because it increases my benefit.”

In today’s video i’m going to show you when it makes sense to draw down your 401k balance in order to increase your social security benefit then spoiler alert is probably less often than you think hey everybody i’m james canal and i’m here to teach you how to get the most out of life with your money now when i’m talking to people about retirement and their plan

With social security of his 401k versus other assets one thing i hear quite a bit is my goal is to defer social security as long as possible to increase my benefit now they’re right in a sense every year you delay social security your benefit goes up you can collect as early as 62 or as late as 70 and every single year every single month in between that time period

Your benefit is going up but this is the thing it’s not the return on investment like you might expect here’s an example of that let’s say i’m going to give you 100 this year and i’m going to give you 100 next year or i can give you 200 next year and nothing today which would you prefer well you look at that and you say okay that’s really not a return on investment

It’s not like i’m getting a 200 return on investment by waiting until next year it’s me just condensing the time frame in which i’m going to give you those dollars same thing is kind of true of social security it’s not truly a return on investment at least not to the full extent because what you’re doing is you’re telling social security instead of collecting for

This many years i’m going to be collecting for this many years in social security says instead of paying you a small amount over this time we’re going to pay you a larger amount over that time now we’ve all heard of that break even age and depending on when you’re going to collect depending on whether you’re collecting really early or 67 or 70 you are going to

Break even likely somewhere around age 81 or 82. meaning if you live until age 81 or 82 what you’re getting is you’re getting that same example of a hundred dollars today and 100 next year versus 200 all next year it’s really not a return on investment it’s just deferring and taking more dollars in the future but your total benefits about the same now any time

That you live past 81 now you’re starting to get an actual return on your investment so when we’re looking at this i want to make that point because here’s something i don’t hear people say i don’t often hear people say i’m going to wait as long as possible to draw my 401k so i can increase i benefit in fact it’s often the reverse i’ll ask people when do you plan

To collect social security let’s say maybe age 70. when are you going to retire oh 62. well what are you going to do for income between 62 and 70. well i’m going to draw down my 401k now here’s the thing yes you’re increasing your social security benefit but rarely do i hear people say my goal is to collect social security early to increase my 401k benefit these

Are both two things that you really need to consider and by the way 401k could be ira it could be 403 b it could be any investment that you have but the question is which of these are we going to take first in order to optimize the other in order to increase the other because we intrinsically recognize that the longer we wait to collect social security the more

We’re increasing that benefit but not so often or very rarely are people saying the same thing about their 401k i rarely hear people say i’m going to defer taking my 401k for as long as possible because the longer i wait the more it grows the more it grows the more income it can generate now the reason for this is very simple and the reason is that growth on the

401k is not guaranteed whereas the growth on your social security is i know that every single year after my full retirement age i delay social security i’m getting an eight percent increase in my benefit again it’s not a true rate of return because it just means i’m foregoing some benefits today to get more in the future but it’s something that we can count on

It’s a benefit we know is going to exist well with our 401k there’s no guarantee of that doing anything that could go up in value 20 to go down in value 20 it could be all over the place so that’s why most people think of social security and maximize their benefit by delaying then fewer people think the same way with regards to their 401k now everyone’s plan is

Unique and everyone should have a very specific strat strategy for what makes sense for their social security for their 401k for their other assets but here’s a potential benefit that most people don’t realize if you start taking your social security early that’s less money that you’re taking from your 401k so that means your 401k can keep growing now people say

Your 401k can also decline well to me all the more reason it might make sense depending on the situation to actually collect social security early and let’s look at an example let’s assume that you retire age 62. and you can collect two thousand dollars per month in social security age 62 or you can collect three thousand dollars per month at age 70. both those

Numbers of course will be adjusted for inflation but today that’s your option and let’s assume that you want to live on five thousand dollars per month well if you delay your social security until 70 that full five thousand dollars per month today is coming from your 401k if your only income sources are social security and then income from your 401k that’s a lot

Of pressure on your 401k and if we’re in the middle of a year like this where the markets are down 20 plus percent not only are you taking more from your 401k but you’re taking more from depressed asset levels putting a whole lot of pressure on your portfolio today yes it’s maximizing your social security benefit but we have to ask what’s the opportunity cost what’s

It costness and future income from our 401k by taking more from there today now the alternative what if you were instead to retire at 62 and collect at 62. again not a recommendation but just illustrating a point here well if you still want to live on 5000 per month and now 2 000 per month of that is coming from your 401k or 2000 i should say is coming from social

Security that just leaves 3 000 that needs to come from your 401k so that’s about twenty four thousand fewer dollars per year that you’re drawing down from your 401k all the more so if we’re in a falling market where you want to preserve as much of that 401k value as possible and yes your social security benefit is going to be lower and you’re locking that in

Forever but what people don’t account for is what’s the positive impact on your 401k what’s the positive impact on your investments that know you’re not adding money to them but by taking less out you’re allowing for that balance to continue growing so that at 65 67 70 and beyond that portfolio bounce is larger which means it can generate more income so this is

Something most people don’t take into account there’s often this sense of i’m going to draw down my 401k to increase my social security but rarely do people talk about drawing their social security first to increase their 401k the other point to that is when you get a rate of return on your portfolio that’s a true rate of return it’s a true rate of return if your

Portfolio goes by eight percent that money is yours to keep it’s not because you’re drawing out fewer dollars over a longer period of time like social security is again go back to that example of 100 per year this year and 100 next year or 200 in the future not a true rate of return it’s just shifting when you’re taking the money a rate of return on your 401k or

Ira or other investments that’s a true rate of return that is more dollars in your pocket regardless of how long you live and if you don’t spend it it’s something that your future heirs can spend so at the end of the day your social security strategy should be based on a comprehensive income plan a comprehensive retirement plan that helps you understand what do you

Do with your investments what do you do with social security what do you do with other income sources with taxes with medicare with all these things this should not be construed to mean everyone should collect social security early as much as illustrating the counterpoint that most people don’t consider when it comes strategy so there’s many other things that will

Impact this things like your investment strategy your income strategy your legacy goals your tax strategy all of those should be considered before you actually design a social security strategy but it should be really customized and unique to you now if you want to see an actual quantified rate of return that collecting social security early might have for you when

It looks at the impact on your overall portfolio be sure to check out this video above where i discuss just that once again i’m james canal founder root financial and if you’re interested in seeing how we help our clients at root financial get the most out of life with their money be sure to visit us at www.rootfinancialpartners.com thank you

Transcribed from video
Should You Draw Down Your Portfolio to Delay Social Security? By Root Financial Partners