Social Security vs. IRA Withdrawals: Which Should Come First?

As a retirement planner, one of the most common questions we get from clients is, “Should I take my Social Security income benefits early, or withdraw money from my IRA first?” It’s a great question with significant financial implications, and the answer isn’t always straightforward. Based on our experience, though, there are some key factors to consider when making this decision, and I’ll walk you through them.

The Timing of Social Security Benefits

Social Security benefits are designed as a financial safety net, but the timing of when you start claiming them can drastically impact your overall retirement income. You can begin receiving benefits as early as age 62, but with that comes reduced monthly payments. On the flip side, delaying benefits past your full retirement age (usually 66 or 67) can increase those payments—up until age 70.

From a financial standpoint, waiting to claim often makes sense. Every year you delay, your benefit grows by about 8%, which can really add up over time if you live a long life. However, not everyone can afford to wait, especially if you need income before age 70. That’s where your IRA comes into play.

IRA Withdrawals: The Pros and Cons

Your IRA or retirement account (e.g., 401(k), 403(b), etc.) is meant to provide income during your retirement years. One advantage of withdrawing from your IRA first is that it gives your Social Security benefit time to grow. But tapping into your IRA too early has its own downsides, like depleting your savings too quickly or paying higher taxes.

Key factors to consider:

• Taxes: IRA withdrawals are taxed as ordinary income, so the more you withdraw, the higher your tax bill. Taking large withdrawals could push you into a higher tax bracket, especially if you’re still working part-time or have other income sources.
• Required Minimum Distributions (RMDs): Once you turn 73, the IRS requires you to start taking RMDs from your traditional IRA. The larger your balance by then, the larger your RMDs will be, potentially pushing you into a higher tax bracket. Starting withdrawals earlier might help spread out the tax burden.
• Market Volatility: If your IRA is invested in the stock market, withdrawing funds when the market is down can erode your savings. This is called sequence-of-returns risk, and it can make a big dent in your retirement plan if not managed carefully.

Social Security as a Safety Net

Unlike your IRA, Social Security is guaranteed for life. Once you start receiving benefits, they’re not going anywhere, and they’re adjusted for inflation, making them an important source of reliable income—especially for those worried about outliving their savings.

While withdrawing from your IRA first allows your Social Security benefit to grow, it also means relying on an asset that can be depleted. Social Security offers longevity insurance—you can’t outlive it, which is a comforting thought for many retirees.

But there’s a trade-off: by delaying Social Security, you’re giving up several years of payments. The question is, when will the higher monthly payments from delaying catch up with the early benefits you could have taken? This is known as the breakeven point, and for many people, it falls in their mid-80s.

Personal Factors: Health, Longevity, and Lifestyle

Your personal situation plays a big role in this decision. Here are some things to consider:

• Health and Longevity: If you expect to live a long life based on your family history, delaying Social Security might be smart. But if health issues are a concern, starting benefits earlier may make more sense.
• Lifestyle: How you plan to live in retirement matters, too. If you’re living modestly, you may be able to delay Social Security and take smaller IRA withdrawals. But if you want to travel, help family, or enjoy hobbies, you might need more income upfront, making your IRA withdrawals more important.
• Marital Status: If you’re married, delaying Social Security could increase survivor benefits for your spouse, offering them a safety net if you’re the higher earner.

The Tax Efficiency Strategy

Combining IRA withdrawals with delayed Social Security can be a smart tax strategy. If you’re in a low tax bracket early in retirement, consider taking small IRA withdrawals to cover your expenses while keeping taxes low. Later, when you start receiving Social Security, your IRA balance may be smaller, reducing the impact of RMDs.

For example, if you’re under the threshold that triggers taxes on Social Security or Medicare surcharges, managing your IRA withdrawals carefully can keep your tax burden manageable. When you start Social Security at age 70, you’ll have maximized your benefits while minimizing RMD-related taxes.

Conclusion: A Tailored Approach

Should you take Social Security benefits early or withdraw from your IRA first? The answer depends on your individual circumstances. There’s no one-size-fits-all solution. In our experience as a retirement planner, a balanced, tax-efficient strategy often works best.

Remember, it’s not just about maximizing your income today. It’s about ensuring financial security for the long haul. By considering factors like health, lifestyle, and taxes, you can make a decision that’s right for you.

If you’d like to explore how Social Security and IRA withdrawals can best fit into your retirement strategy, or simply want personalized guidance on your retirement income options, CLICK HERE to book a complimentary consultation. We’ll review your financial situation and provide professional advice on whether delaying Social Security or tapping into your IRA first is the right choice based on your age, goals, and overall financial position.