Should clients drawdown retirement savings first, as a “bridge” to delay taking Social Security until age 70?
While this idea has been around for some time, a recent study by the Center for Retirement Research at Boston College (CRR) looked at taking automatic withdraws from 401(k) plans from ages 60-69 before touching Social Security benefits.
The study — How Best to Annuitize Defined Contribution Assets — by CRR Director Alicia H. Munnell, as well as researchers Gal Wettstein and Wenliang Hou, also compared the 401(k) withdraw plan to using some of that money to buy immediate and deferred annuities.
The research aimed to find a strategy to set withdrawals from retirement savings so people don’t outlive their resources. It also examined how few people wait until age 70 to take Social Security: only 5% of men and 7% of women.
Plus, just 23% of men and 16% of men wait until their full retirement age (or FRA). A large population — 35% of men and 39% of women — begin taking Social Security at age 62, which cuts their benefit dramatically. It is estimated that claims taken at age 70 are 76% higher than those taken at 62.
Thus, the study looked at how using 401(k) plans as default payments for those 60-69 could equal what they would be getting if they were taking Social Security at the FRA.
“The expectation is that providing a temporary stream of income to replace the Social Security benefit would break the link between retiring and claiming,” the authors stated.
Comparing this strategy to immediate and deferred annuities, they found the 401(k) drawdown plan was “the clear winner,” at least for median households; the success overall is tied to wealth distribution.
For higher-wealth households, “the deferred annuity strategy is again competitive, edging out the Social Security bridge options,” the authors said.
However, depending on required minimum distributions that hit at age 72, “the deferred annuity remains a very poor choice, for both median- and 75th percentile wealth households,” the study found.
Both Michael Finke, professor of wealth management at The American College of Financial Services, and David Blanchett, Morningstar’s head of retirement research, support delaying taking Social Security benefits.