Social Security vs 401(k): How to Make Them Work Together for a Richer Retirement
Plus, the smart strategy experts recommend to maximize both income sources in retirement
Americans save their whole lives to get to retirement age. And when the time comes, it’s common to rely on 401(k) and monthly Social Security payments to get by. And while both can be helpful, it’s not always clear which one to use first. To help get answers, Woman’s World sat down with a financial expert. Read on for more.
Social Security vs 401(k): What each plan actually is
A 401(k) is a retirement savings plan that lets you invest a portion of your paycheck into an investment account. The employer-sponsored plans can help you build an investment portfolio that you can tap into once you retire. Often, companies will match a portion of your savings, making it grown even bigger.
“On the 401(k) side, small contributions make a big difference,” says Phoebe Story, growth and development director at Northwestern Mutual. “People are often surprised by how much small, consistent contributions can compound over time. Even setting aside $50 or $100 per paycheck can grow substantially over decades,” she says. “I typically recommend to my clients an annual contribution increase of 1 to 2 percent, which can be a sustainable way to increase your savings year over year. The big takeaway here is to start retirement planning early—the sooner you begin, the better the potential return.”
Social Security, on the other hand, is a government-funded program that disperses money to retirees monthly. It’s based on your previous working income or that of your spouse, and, unlike a 401(k), the money never runs out. Once you’ve reached full retirement age (currently 67) and begin receiving benefits, you’ll receive your allotted amount until you die. If you never worked, you can still get benefits as long as you are enrolled in a Supplemental Security Income plan.
“Social Security adds up to more than you might think! One of the biggest surprises is the sheer value of Social Security over a lifetime,” says Story. “For someone who lives into their late 80s or 90s, the total benefit received can be comparable to a significant investment portfolio.”
Social Security and 401(k) differences and similarities
“Think of a 401(k) and Social Security as two different paths leading to the same destination: financial security in retirement,” explains Story. “Both reward long-term participation and are shaped by your working years. The longer you contribute to your 401(k) and the more years you work—which affects your Social Security benefits—the more financial cushion you’ll have when you’re ready to retire.”
That being said, the two programs do have significant differences:
“A 401(k) is your personal retirement account—you’re in the driver’s seat. You decide how much to contribute, how the money is invested and what the withdrawal looks like later in life,” explains Story. “Social Security, on the other hand, is a government program where you have no personal investment control. Your benefit is determined by a set formula based on your earnings history and the age at which you claim.”
“Here’s the trade-off: A 401(k)’s balance can rise or fall with the markets, and without careful planning, it’s possible to outlive the funds,” she continues. On the other hand, “Social Security offers a steady, inflation-adjusted monthly income for life, providing a level of financial stability and longevity protection that a 401(k) alone may not guarantee. “
Is a 401(k) or Social Security better for retirees?
At the end of the day, Story says, “one source isn’t universally better—it really comes down to your individual situation and creating a strategy that uses both, if you’re able!”
“A popular approach is to draw from a 401(k) first and delay Social Security. Many retirees use their 401(k) to cover expenses in their early retirement years because Social Security offers something your 401(k) doesn’t—a guaranteed, inflation-adjusted increase in benefits for every year you wait to claim, up to age 70,” she continued. “By delaying, you can secure a higher Social Security payment for life, which provides long-term stability and protection against the risk of outliving your savings. But this isn’t a one-size-fits-all model. In some cases, claiming Social Security earlier or preserving your 401(k) may be the smarter choice. The most effective approach is to create a coordinated plan with a financial advisor that optimizes both sources of retirement income, tailored to your unique needs and goals. This empowers you to make informed decisions that align with your ultimate vision for retirement.”
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