When you retire, it’s important to have a steady income to replace your paycheck. Social Security and your savings, like an IRA or 401(k), are two sources of income that can help you live comfortably in retirement. But when you retire, you may wonder: should I start claiming Social Security benefits first, or should I dip into my savings first? This decision isn’t easy and depends on several factors, such as how much money you have saved, your expected lifespan, and the condition of the financial markets. Let’s explore the pros and cons of both options and help you make a better decision for your future.
Understanding Social Security and Savings
Social Security is a government benefit that provides monthly payments to retirees. If you are at least 62 years old, you can start claiming Social Security. The longer you wait to claim Social Security, up to age 70, the higher the monthly benefits will be. Your savings, which might include a 401(k) or IRA, are also an important part of your retirement income. You can start tapping into them once you retire, but there are pros and cons to consider before doing so.
Pros of Delaying Social Security
One of the best reasons to delay claiming Social Security is that you can get a higher monthly benefit the longer you wait. Every year you delay past age 62, your monthly Social Security payment will increase, up to age 70. This means you could end up with a much bigger monthly income if you wait to claim Social Security until later.
Also, if you have a traditional IRA or 401(k), your investments can grow tax-deferred. This means that you don’t pay taxes on the growth of your investments until you withdraw the money. If you have a Roth IRA or 401(k), your investments grow tax-free, which is even better. Keeping your savings growing without touching them allows you to take full advantage of this tax benefit.
Pros of Tapping Into Your Savings First
On the other hand, using your savings to cover expenses in the first few years of retirement could be a good idea. If you have a lot of savings, you may not need to claim Social Security immediately. You can use your savings to pay for living costs and let your Social Security benefits grow until you are ready to start collecting a larger monthly amount.
Additionally, if the financial markets are down when you retire, it may be a good idea to hold off on selling your investments. Selling investments in a down market means locking in those losses. In this case, it may make more sense to rely on Social Security benefits to cover your expenses instead of selling investments at a low price.
Things to Consider Before Making a Decision
There are a few factors that will help you decide whether you should claim Social Security first or tap into your savings:
1. Your Savings Balance
If you have a large amount of savings, you might feel comfortable delaying Social Security for a few years. However, if your savings are limited, you may want to start claiming Social Security earlier so you don’t run out of money in case of an emergency.
2. Market Conditions
If the stock market is doing poorly, selling investments might cause you to lose money. If this is the case, claiming Social Security might be a better choice because it’s a guaranteed source of income that won’t be affected by market conditions.
3. Life Expectancy
Another important factor is how long you expect to live. If you think you will live for a long time, delaying Social Security could be a smart choice. The longer you wait, the bigger the monthly payments will be when you do start collecting.
Consulting a Financial Advisor
Since the decision to claim Social Security versus tapping into your savings depends on so many factors, it’s always a good idea to consult a financial advisor. A financial advisor can help you evaluate your savings, look at market conditions, and provide guidance based on your specific needs and goals. They can help you make the best choice for your financial future.
Conclusion: Making the Right Decision for You
In the end, the decision to claim Social Security versus using your savings depends on several factors. If you have plenty of savings and are confident about your financial future, delaying Social Security may be the best choice. But if you don’t have enough savings or if market conditions are unfavourable, claiming Social Security early may provide more stability. The most important thing is to think about your own situation, consider the different factors, and, if needed, seek help from a financial advisor to make a decision that works for you.
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