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Should You Withdraw from your Retirement Accounts or File for Social Security?

Almost half of retirees take Social Security at age 62, the earliest possible age you can sign up for these benefits.  And the vast majority of retirees request benefits before full retirement age.  While the decision of when to file for Social Security benefits must be based on individual circumstances, I would argue that many retirees would be better served to wait longer to access this lifetime, inflation-adjusted stream of income. 

Often the decision to file for Social Security prematurely is based on a misguided reliance on questionable retirement planning rules of thumb.  For instance, some retirees have an unhealthy aversion (financially speaking) to drawing down the principal in their investment accounts, and aim to live on dividends and interest regardless of the consequences.  Given the choice between "touching principal" and filing for Social Security, this subset of retirees choose the latter.

Other retirees strictly adhere to the rule of thumb that a 4% annual withdrawal rate from their retirement nest egg will enable it to last as long as they live.  While there is a large amount of academic research into sustainable withdrawal rates in retirement (some of it concluding that rates as high as 6% are sustainable, and more recent studies questioning whether even 4% is safe in this era of low interest rates and high stock market valuations), taking Social Security early so that you don't have to withdraw more than is "safe" from your nest egg can be a short-sighted financial decision.

With a longer-term perspective, it may instead be wiser to tap retirement or investment accounts at what may seem like unsustainably high withdrawal rates, say in excess of 6% (or for that matter, to draw down on principal and capital gains) for a few years if that allows your Social Security benefits to grow the 7 - 8% annually plus inflation in the meantime.  This strategy might seem to contradict a couple of the many misguided financial planning rules of thumb.  However, maximizing the size of your monthly check from the SSA can pay huge dividends in terms of long-term tax efficiency and survivor protection, as well as reducing longevity, purchasing power, and investment risks.  Several retirement projections I've performed for clients have borne this out.

Making the right decision from the start about when to take Social Security has now become even more important, and not just because of the decline of traditional pension plans.  Until a few years ago, recipients could change their minds, repay the SS received to that point without penalty or interest, and then refile for benefits at the new, higher level, as many times as they wished.  Because of the potential for abuse, the Social Security Administration now limits retirees to one second-chance, and then only in the first 12 months after filing.

About the Author

Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.  

Contact Paul