Many people wonder which is better to rely on, Social Security payments or your 401k income. What they don’t realize is that you can receive both Social Security as well as 401k income. Whatever income you receive from your 401k plan will also not affect your Social Security benefits, since it is considered income from a non-wage source.
Most workers count the days until they can retire at full retirement age, 66 years old, and frequently begin receiving Social Security benefits within the first few months of their retirement, as well as their 401k income. Some will retire as early as 62 in exchange for lower monthly benefit payments from Social Security going forward. At the other end of the spectrum, some delay collecting Social Security until the latest allowable age of 70 and reap the benefits of much larger monthly payments in return.
Why 401k Income Has No Effect on Social Security Payments
One of the foundational tenets of Social Security is that the credit system for qualifying for benefits is based on taxable wages that you earned during your highest-paid 35 years of work. Your contributions to your 401k are made with wages paid to you by an American company, which has already paid the Social Security taxes on those wages.
Many people contribute as heavily as possible to their 401k, however, under the impression that those contributions are tax-free. Well, they are, sort of. Those contributions can be made free of income tax imposed by federal and state entities, but not by contributions required by the Federal Income Contributions Act, or FICA.
No matter what, your wages will always have the tax for Social Security paid before anything else can reduce your income level. So you do still pay some taxes, up to a preset threshold that is determined by the IRS.
The Difference in Dollars
So you are getting close to retirement age, or maybe just planning well ahead to ensure your comfort, and you want to get down to numbers on what retirement is going to look like. Well, there are a few scenarios centered around when you retire. You can begin collecting Social Security at 62, the full age of 66, or as late as 70. While you might get to begin enjoying retirement early, the change in benefit amounts by delaying can be incredible.
Using the top-end numbers for 2021, the highest monthly benefit when retiring at 62 is about $2,300 while waiting until 66 gives a monthly payment of more than $3,100. And for those waiting until 70, they can collect a massive benefit of nearly $3,900.
If you are planning on retiring early, your 401k income can certainly supplement your Social Security income without affecting it. On the other hand, if you have a few years to go, you may still be able to start taking life a little easier by utilizing your 401k income while you delay Social Security collection until you get the maximum benefit.
