Social Security provides a monthly income bridge that can replace Social Security benefits after you stop working. It is a bridging strategy for retirement financing without claiming Social Security benefits in advance, aiming to boost your Social Security income. Delaying your Social Security benefits until you reach full retirement age or 70 can ensure you receive a higher, inflation-protected check and reap its lifelong benefits, thus potentially improving your spouse’s financial prospects.
Those who claim benefits before turning 70 are penalized by Social Security, resulting in reduced benefits. Hence, for many individuals, delaying the receipt of Social Security benefits makes sense. But is the Social Security bridge strategy suitable for everyone? There are several methods to implement this strategy.
The Social Security bridge offers a monthly income post-work that can supplement Social Security benefits. This allows you to receive an actual monthly income while letting your Social Security benefits continue growing. The longer you postpone claiming Social Security, the larger your benefits become.
Calculating the numbers is crucial when deciding between starting or bridging Social Security benefits. These figures vary by age, with your Full Retirement Age (FRA) typically being 66 or 67 based on your birth year. Opting for early retirement and claiming benefits before reaching FRA will permanently reduce your benefits.
For instance, for those born after 1960 with an FRA of 67, let’s assume a full retirement benefit of $1,000 monthly; if they retire at 62, benefits decrease by 30% to $700 per month, and spousal benefits drop by 35% to $325 monthly.
A well-thought-out Social Security bridge strategy can delay benefit claiming to avoid penalties and allow your benefits to grow, serving as a bridge between your working and retirement years.
One common bridge option is for retirees at 62 to withdraw funds from their retirement accounts, such as Individual Retirement Accounts (IRAs) or 401(k) plans, before starting Social Security benefits. The withdrawn amount parallels their Social Security benefits, while deferring Social Security. Essentially, individuals utilize retirement savings to secure higher lifetime income, ensuring guaranteed higher income for the rest of their lives.
For example, if an individual’s Social Security retirement benefit at 62 is $2,572 monthly, it increases to $4,555 monthly by age 70. At 62, they can opt not to commence Social Security but withdraw $2,572 monthly from their 401(k) until starting benefit collection at 70, ceasing withdrawals at that point.
With Social Security benefits growing annually by 8%, potentially higher than a 401(k) return, the bridge strategy mitigates the risk of retirees and their spouses depleting retirement savings. The enhanced Social Security benefits can help bridge any financial gaps.
Annuities are another means to bridge the gap between not working and Social Security. They offer steady income, allowing you to delay Social Security benefits. There’s no need to purchase a lifetime annuity; if you retire at 62 and plan to start Social Security at 70, you might opt for an eight-year annuity, or a five-year one if your FRA is 67.
Choosing a specific term often results in higher monthly payments than a lifetime annuity. The shorter the term, the higher the payments. An annuity serves as an insurance product akin to self-funded pensions. In many instances of bridging the gap with annuities, individuals prefer single premium immediate annuities without additional conditions, typically starting payments within 12 months after depositing the sum, according to Thrivent.
Purchasing a series of Treasury Inflation-Protected Securities (TIPS) with varying maturity dates can create a tiered income stream over time to bridge the gap until reaching FRA or starting Social Security at 70. For instance, a 62-year-old looking to delay Social Security to 70 could acquire an eight-year TIPS ladder aiming to provide an amount equivalent to Social Security payments.
The major advantage is enhancing your Social Security benefits for life. Once you’ve maximized your Social Security benefits, it eases the strain on your retirement accounts and potentially reduces the Required Minimum Distributions (RMD) you need to withdraw at 73, as mandated by the IRS.
Yet, potential drawbacks exist. Overspending in your 60s may lead to financial scarcity in later years. You also need confidence in the Social Security Administration’s ability to maintain solvency and fulfill expected benefits.