Additional Coverage:
- Retirees Who Do This Before Claiming Social Security End up With Bigger Checks for Life (financebuzz.com)
Spending some of your retirement savings earlier than planned might feel counterintuitive, but in certain circumstances, it can actually increase your Social Security benefits over time. This approach, often called the “bridge strategy,” involves using your savings to cover expenses while delaying Social Security claims, allowing your monthly benefit to grow.
How the Bridge Strategy Works
Delaying Social Security beyond your full retirement age can boost your benefits by approximately 8% for each year you wait, up to age 70. For example, if you’re eligible for $2,000 per month at age 67, waiting until 70 could increase your payment to around $2,480 monthly.
During the waiting period, you can tap into your savings to cover living expenses instead of collecting Social Security. When you start benefits at 70, you’ll receive the higher amount-and future cost-of-living adjustments will be based on that larger sum, helping protect your income against inflation as you age.
When Does Waiting Pay Off?
Although delaying Social Security means passing up payments between ages 67 and 70, the increased monthly benefit typically compensates for these missed checks by your early 80s. Considering that the average 65-year-old today lives into their mid-80s, many retirees stand to benefit financially from waiting. If you live into your late 80s or 90s, the cumulative advantage of the larger checks becomes even more significant.
Who Benefits Most from the Bridge Strategy?
This strategy is best suited for retirees with sufficient savings to cover several years of expenses without jeopardizing their financial security. It’s important to maintain an emergency fund to handle unexpected costs.
Additionally, good health and a longer life expectancy make waiting more advantageous. Conversely, if you face health issues or carry high-interest debt, it may be wiser to begin Social Security earlier and prioritize paying down debt.
Tax Implications of Different Accounts
Where you draw money from during these bridge years can impact your tax bill:
- Cash savings: Using cash reserves typically does not increase taxable income.
- Taxable investments: Selling investments may trigger capital gains taxes, but only on the gain portion.
- Traditional IRAs or 401(k)s: Withdrawals count as taxable income and could raise your tax bracket if taken in large amounts.
- Roth IRAs: Qualified withdrawals are generally tax-free, making Roth funds useful for spending without increasing taxable income.
A balanced approach-drawing from multiple sources-can help manage taxes effectively.
Effects on Required Minimum Distributions (RMDs)
Withdrawing from tax-deferred accounts during the bridge years reduces their balances, potentially lowering required minimum distributions that begin at age 73 or 75. Smaller RMDs can keep your taxable income and Medicare premiums down in later years, offering additional financial benefits.
Additional Considerations for Couples
For married couples, the decision to delay Social Security by the higher-earning spouse can enhance survivor benefits. If the higher earner waits until 70, their increased benefit can provide greater income to the surviving spouse. Meanwhile, the lower earner may claim benefits earlier to support household cash flow during the waiting period.
Bottom Line
If your savings can comfortably cover a few years without Social Security, the bridge strategy can be a powerful tool to secure larger, guaranteed monthly income down the road. Thoughtful planning-taking into account health, financial needs, and tax implications-can optimize your retirement income and provide greater peace of mind.
Additional Money Tips for Retirees
Regardless of your current savings, there are always ways to strengthen your financial position:
- Increase your income: Consider side jobs or other income streams to supplement your retirement funds.
- Grow your wealth: Take advantage of time and compound interest, and consult a financial professional to create a plan tailored to your goals.
- Maximize benefits and savings: Look for discounts and deals available to seniors, shop wisely for insurance, and avoid common financial pitfalls that can quietly drain your resources.
By combining strategic Social Security planning with smart money management, you can build a more secure and comfortable retirement.