Delaying Social Security While Pulling from Pre-Tax Accounts: Your Options Explained 

As retirement approaches, delaying Social Security benefits and using pre-tax account withdrawals to cover expenses can be a smart move. This strategy may increase lifetime benefits, lower taxes, and provide greater flexibility.  We’ll explore how delaying Social Security works, how to bridge the income gap, and how to balance tax impact with longevity risk.

Why Delaying Social Security Might Make Sense

Early Social Security claimants receive a lower benefit. Claiming at age 62 can result in roughly 30% less than the full retirement age (FRA) amount. By contrast, waiting beyond FRA can increase benefits by up to 8% per year until age 70. To illustrate, delaying from age 62 to 70 can raise the monthly benefit by about 77%, resulting in an extra $2,187 per month for those reaching the maximum benefit rate.

When delayed retirement credits were designed, life expectancies were shorter, and interest rates were higher.  Today, with more people living into their 80s and 90s, Social Security is a form of guaranteed income, and with recent projections suggesting centenarians will quadruple by 2054, it becomes especially valuable.

The typical break-even age is between 78 and 82 years old. For those who live beyond that age, delaying benefits results in higher total payouts over time.  

Bridging the Income Gap: Pre-Tax Account Strategies

Waiting to claim Social Security can create an income shortfall in early retirement. To cover expenses, retirees may draw from traditional individual retirement accounts (IRAS) or 401(k)s.  A “bridge” strategy can help manage income and taxes during this period. Here are some tips.

1. Follow a withdrawal sequence: This approach leverages favorable tax rates while preserving tax-free growth in Roths. Alternatively, proportional withdrawal strategies—drawing from all account types based on value can stabilize annual tax exposure.

A study by T. Rowe Price found that converting to Roth IRAs before claiming Social Security starts can lower lifetime taxes by around $44,000 and increase legacy value by an estimated $33,000.

1. Avoid the “tax torpedo”: Withdrawals from pre-tax accounts raise taxable income, which may make more of an individual’s Social Security benefit taxable.  For example, a carefully timed Roth conversion strategy could limit benefit taxes to 33% instead of 51%, significantly reducing lifetime tax liability.

Weigh the Trade-Offs

Delaying Social Security increases income, but requires sufficient savings to avoid early withdrawals or working longer. This approach may not suit everyone.  A Kiplinger survey showed 64% of retirees claim benefits before full retirement age, often because they need the income or underestimate how long they’ll live.

Claiming early also reduces the need to tap retirement savings initially. This allows investments time to grow, an advantage in strong markets.  In some cases, early claimers reach break-even between ages 77 and 86, depending on market performance.

However, for those expecting to live into their 80s and 90s, waiting can result in higher, inflation-adjusted lifetime income.

Planning Steps to Consider

1. Project income needs: Map your expenses and compare them against Social Security and other income streams.
2. Monitor tax outcomes: Avoid high marginal brackets, especially those triggered by Social Security taxation.
3. Reevaluate annually: Respond to market performance, spending, and health changes with regular updates and reviews.
4. Work with a financial advisor: Seek guidance from a professional to help determine the best time to take Social Security and create a plan that combines all your income sources, helps reduce taxes over time, and supports your long-term financial legacy goals.

Delaying Social Security and coordinating withdrawals from retirement accounts can significantly improve retirement income and reduce taxes. For help determining your break-even age, choosing withdrawal strategies, or optimizing Roth conversions, reach out to one of our advisors at SHP Financial.  Our income planning balances tax efficiency, longevity risk, and legacy goals. We’ll help you construct a bridge strategy to fit your needs. Contact us today for a complimentary review of your finances.