The CRR researchers created a model using household survey data from 2016 that showed 65-year-old single men who had 401(k) savings had a median account value of $106,000 and were eligible for an annual Social Security benefit around $15,400. Women with 401(k) savings had a median account value of $110,000 and were eligible for an annual Social Security payout of around $14,500.
CRR then calculated how withdrawing money from the 401(k), in place of drawing Social Security, compared to buying an immediate-income annuity or a deferred income annuity.
For the record: Both of these types of annuities are solid ways to generate guaranteed retirement income. But as the researchers note, even when they may be a smart strategy, retirees have shown little appetite for handing over a big chunk of their savings to an insurance company.
Your Social Security benefit is in effect an annuity that you already own. The researchers set out to see how waiting for the optimal time to claim — age 70 — stacked up against the commercial annuities you could use to generate guaranteed retirement income.
The model factored in investment risk (for a diversified retirement portfolio), life expectancy, and the probability of later-life spending “shocks” (see: healthcare expenses).
For both a single man and woman, with median 401(k) wealth, drawing down a portion of their retirement savings as a “bridge” that allows them to delay claiming Social Security is the best way to go to generate optimal retirement income. The strategy is also smart for households with above-average 401(k) savings.