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Social Security vs. 401k

When planning for retirement, it's important to understand the difference between Social Security vs. 401k plans. Each can provide an important source of income to help support you and your family after you stop working, but how you optimize which benefits you claim and when you claim them will depend on the specifics of your situation.

Social Security Retirement Benefits

Social Security retirement benefits provide you with a monthly payment when you retire. To qualify for Social Security retirement benefits, a typical worker must work for at least ten years. The size of your retirement benefits are based on your taxed earnings during your working years; the more you make, the higher your monthly payments will be. Similarly, if you delay retirement, your monthly benefits will be increased.

When Your Social Security Retirement Benefits Begin

If you retire early, you may begin collecting Social Security benefits at age 62. However, these payments will be less than if you waited to claim your benefits at full retirement age. Full retirement is age 65 for workers born in 1937 or earlier and rises gradually to 67 for those born in 1960 and later. At full retirement age you can receive 100% of your earned Social Security benefits. If you delay retirement, your benefits will increase yearly until you reach the age of 70. This can allow you to receive benefits up to 24% higher than if you had retired at full retirement age.

401k Retirement Plans

A 401k is a voluntary retirement savings plan sponsored by your employer. Its name comes from the section of the tax code that governs this type of retirement plan. A 401k lets workers set aside a percentage of their income for retirement. This money is then invested and distributed at retirement. 401k contributions are taken directly from a worker's paycheck, untaxed, and are often matched by an employer. The most common matching rate is 3%, meaning that if you contribute 3% of your salary, your company will put the same amount into your 401k. You may contribute more, but your employer will not match beyond the selected rate. The IRS limits the amount you and your employer can contribute. For example, an employee's elective deferrals were limited to $18,000 a year in 2015.

When Can You Begin Collecting from Your 401k?

Generally, you can't start collecting from your 401k until you reach the age of 59 and a half, or earlier in certain other circumstances like disability or termination of your plan. Of course, you can delay collecting from your 401k beyond age 59, but most plans require that you begin receiving distributions by age 70 and a half if you continue working beyond normal retirement age.

Retiring On Social Security vs. 401k Income

When you retire, you can collect both Social Security retirement benefits and distributions from your 401k simultaneously. The amount of money you've saved in your 401k won't impact your monthly Social Security benefits, since this is considered non-wage income. However, since your Social Security benefits increase if you delay retirement, it may be beneficial to rely on 401k distributions in the early years of retirement.

Most workers begin receiving Social Security benefits within months of their retirement. But for those who retire before full retirement age, collecting early means their monthly benefits will be lowered. A delay of just two years can increase monthly benefits by 14%, and delaying retirement until age 70 can increase them by much more. Take, for example, a worker whose Social Security benefits would be $1000 a month at a full retirement age of 66. Should he retire at 62, his monthly payment would be $750. If he waited to collect until age 70 he would earn $1,320 a month. That's $570 more than earned in early retirement.

While many people collect Social Security right after retirement, most wait until 70 to begin spending their 401ks. Living off 401k vs. Social Security payments in the early years of your retirement can allow you to defer the date you claim Social Security, thus increasing your later Social Security payments. If your annual 401k investment returns are under 5%, it might be more financially beneficial to postpone collecting Social Security while you live off your 401k retirement account.

Further Considerations and Next Steps

What makes the most sense for your retirement will depend on a number of factors, including how much you've saved over the years, when you plan on retiring, medical needs and the return you receive on your 401k investments. Married workers should consider what retirement benefits are available to their spouses as well. If you have questions about balancing your Social Security or 401k retirement payments or what sort of benefits you may be entitled to, consider contacting a lawyer experienced in retirement planning to discuss what options are available to you.

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Next Steps

Contact a qualified social security lawyer to assist in your retirement benefits or planning.

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