Should you draw from your 401(k) and delay claiming Social Security benefits? Here's what you need to know before you decide

It’s a phased approach to retirement income that taps your 401(k) or other assets but avoids Social Security until you reach the FRA.

A common approach to bridging involves withdrawing funds from a 401(k) as soon as it’s possible to do so without triggering penalties, and only withdraw an amount equal to what you would pull from Social Security at age 62, the earliest age available.

What does the research say?

A paper by researchers at the Center for Retirement Research at Boston College found that about one-third of workers could benefit from this bridging technique.

Researchers Alicia Munnell and Gal Wettstein found that middle- to upper-middle class citizens with about $250,000 or less in retirement savings could benefit by using their 401(k) assets to obtain “an amount equivalent to their Social Security benefits so they can postpone claiming benefits, thereby increasing their monthly payment when they do eventually claim.”

The Boston College study suggests workers would be inclined to participate in workplace-sponsored bridging programs, in which employers would make payments to retirees from their 401(k) accounts equal to their Social Security benefit if claimed.

“A Social Security bridge would help individuals reap the benefits of delayed claiming without having to alter their retirement age,” the paper concludes. “This simple approach would allow retirees to enjoy an income stream consistent with their expected lifelong benefit level while increasing that level through delayed claiming.”

That default option would be more likely to be maintained than if it were an annual elective, the study finds.

According to research by the Investment Company Institute, as of September 2022, there were about 60 million active 401(k) participants with accounts holding over $6.3 trillion in assets. Many of them are middle-income earners, the sweet spot of earners most likely to consider a bridging approach as suggested by the research.

The benefit of delaying Social Security payments

How much of a boost will your Social Security benefits get if you wait?

According to a December article from AARP, for every month between full retirement age and age 70 that you postpone filing for benefits, Social Security increases your eventual payment by a total of 8% for each year you wait. For example, wage earners who reach full retirement age at 67 but delay claiming benefits until 70 will get an extra 24% on to their monthly payment.

Here is a breakdown of the maximum monthly benefits for 2023:

• $2,364 for someone who files at 62.
• $3,345 for someone who files at full retirement age (66 and 4 months for people born in 1956, 66 and 6 months for people born in 1957).
• $4,194 for someone who files at age 70.

For comparison, the average Social Security benefit for 2023 is estimated at $1,827 a month.

Read more: Boomer's remorse: Here are the top 5 ‘big money’ purchases you’ll (probably) regret in retirement and how to prepare for them

Psychology of tapping your 401(k)

Waiting for the maximum payout isn’t necessarily an easy decision.

Part of the challenge for current and would-be retirees is the psychology of a perceived “premature” dip into their 401(k) stash, which for many Americans represents the primary vehicle for retirement savings. Touching those assets early has long been considered a mistake under the presumption that the longer the funds stay invested in the market, the bigger the payoff.

For instance, personal finance author and podcast host Suze Orman has long warned her audience of the risks of withdrawing money from your 401(k) before you actually retire.

But there’s a key consideration: 401(k)s will eventually run dry. Social Security — at least in theory — won’t run out.

Experts say that serious concerns about Social Security’s long-term viability aside, using 401(k) assets as a bridge to a bigger Social Security benefit makes sense.

Claiming Social Security at age 70 versus 62 — the earliest eligibility — translates to a massive increase in the monthly benefit. That amount is likely to be competitive with the return on 401(k) investment accounts, whose portfolios typically become more conservative as the holder ages.

Moreover, Social Security doesn’t face the same risk levels as a 401(k). The level of payout will remain static, with the age of the claimant the only significant variable.

Bridging isn’t risk-free. At least 38 states currently tax retirement distributions, and 401(k) holders who planned to use those assets to distribute funds to heirs could face an awkward choice.