Let's talk about a Social Security bridge strategy. This is one of those
things where people often end up just doing it on their own without
knowing that it's a fancy strategy or necessarily even caring, but other
people can really benefit from hearing about how it works and understanding
some of the benefits, so you can potentially maximize your retirement income,
you can manage your risk in retirement, that's especially helpful in those
later years, you can open the door to some nice tax strategies,
you can potentially provide for a surviving spouse, and there may be some
other benefits. So that's what we're going to talk about in the next
couple of minutes here. We'll go over what the strategy is,
how it works, some of the pros and cons, and then a couple
of the tips that might help you use it effectively. Most people take
their benefits early, age 62 or somewhere close to there, so you can
claim as early as age 62, and then you might claim as late
as age 70, claiming early allows you to get that income as soon
as possible, but it results in a reduced income, and we'll get into
those numbers in a second, so that's not necessarily a bad thing,
there could be perfectly good reasons for claiming early, and there's no
shame in that, but if there is a better strategy that can help
you make the most of your money and your income. It's at least
worth exploring. So a bridge strategy could make sense for anybody who retires
any time before their late 60s, let's say, and when you do that,
you retire but you don't take benefits yet. Where do you get the
money from to pay your bills? Well, we're going to answer that question
with a bridging strategy in mind, this is something that you can implement
on your own, this is also something that they're talking about adding to
retirement plans at your workplace, like a 401K, for example, but it really
is something you can customize on your own, I often find that clients
want to kind of utilize it and maybe totally use it,
wait till age 70, but let's talk about exactly what all of that
means. So a simplified explanation of what it means is this:
You stop working, but you don't necessarily start your Social Security retirement
benefit right away, instead you would draw from your savings and investments
anything you've earmarked for retirement, that might be in your IRA...
401K, 403b, TSP, wherever you have some retirement assets saved. You draw
down those assets and it might be at a relatively high rate,
during that time, your Social Security retirement benefits should be increasing,
which will help you out later. Once you reach the appropriate age,
whatever that might be, you turn on your Social Security benefit,
start taking income that higher income than you would have gotten earlier,
and that will result in smaller withdrawals, in other words, you'll be pulling
from your accounts at a lower withdrawal rate, which makes your money presumably
last a bit longer. So let's put some numbers to that.
The Social Security Administration gives us some sample statements to look
at, we might say You stop working at age 62 here and your
benefit might be 1465 per month, so if you wanted to use a
Social Security bridge strategy, you would not claim right away and get
that 1465 a month instead, you would withdraw 1465 a month from your
savings, and you do that for a number of years, as you can
see, your benefit will increase year by year as you delay,
and in fact, it's a monthly increase, a small monthly increase,
then at some point, we would turn on your Social Security benefit and
reduce those withdrawals from your savings, now, that's just a sort of simplified
example, if you need to adjust for taxes, for example, you might need
to pull out a little bit more each month. And you don't necessarily
need to follow what's on your statement very rigidly like that,
you could, for example, take out a different amount, you might end up
just doing this for a number of years, maybe even just a number
of months, you don't necessarily have to wait until age 70,
or wait until your full retirement age. To turn on your Social Security
benefit, this is really something you can customize and make work for you
however is best. It's. Really important to maximize that Social Security
benefit wisely, because it has a couple of unique features, number one,
it's government guaranteed, so it's quite safe, unlike a, let's say a private
pension from an employer or an annuity that you might purchase from an
insurance company, those are both fairly safe, unlikely to run out of money
or go belly up, but a government guaranteed payment is even safer.
It's also an inflation adjusted payment, so we can look at the Social
Security Administration's history of the cost of living adjustments, and
you can see that maybe it doesn't match your inflation perfectly,
but there are some nice increases here in periods when inflation is high,
they tend to make some adjustments that can help you up,
now, inflation can wreak havoc on a retirement strategy if you're taking
withdraws from a portfolio, especially if that inflation happens to correspond
with some market downturns while you're taking bigger withdrawals, so this
can be certainly helpful for you as you plan for a lifetime of
income and speaking of lifetime income, it is guaranteed to last for your
life. So the Social Security payments would continue for as long as you
live, whether you live to be a very old age or not so
much, that again, is a way to avoid running out of money during
your life... So if you run out of money, like run out of
assets, for example, you would still have some income coming in,
and that's especially helpful if you have boosted or maximized that income
that you're going to get from Social Security, so one more reason to
consider this bridge strategy and finally, the calculations they use could
be based on some life expectancy tables that reflect people with health
that is maybe not as good as you, so if you happen to
be fortunate, let's say that could be a really good way to get
some income, that might be better than some of the alternatives out there,
so we'll dig into these pros and cons just a little bit more.
Now, I am Justin Pritchard, I help people plan for retirement and invest
for the future, and in the description below, you're going to find some
resources I think you'll find helpful, some of it is the things that
we have been looking at here, there will also be some information on
more general retirement planning, and I think that stuff could be really
helpful for you as you plan for your future. Also a friendly reminder,
it's just a short video. That can't possibly cover everything. So please
talk with some professionals and do a lot more research before you make
any decisions on these important topics, please hit pause and read that
if you need more time, so let's talk a little bit more about
those benefits. The big one, of course, is that you can maximize your
income in retirement, so that helps you meet your monthly expenses and pay
for those wants and needs during your retirement years. The reason for that,
of course, is that your benefit amount is based in large part on
the age at which you claim, it also depends on how much you
earned during your lifetime, and then some inflation adjustments will also
kick in, but for most people approaching retirement, these days, full retirement
age is around age 67, and so again, you can claim as early
as age 62, but if you do that, you get only 70%
of your FRA or your full retirement age amount. So in other words,
for every 1000 that you would have received, you would get only 700
per month, and that reduction sticks with you for the rest of your
life for the most part. On the other hand, if you delay claiming,
you can get quite a bit more, you can get a bonus of
what amounts to about 8% per year. Technically these increases happen monthly,
so you don't have to wait until a calendar year or until your
birthday necessarily to get these bump ups in your benefit, so you can,
again, customize this for however it's going to work best for you,
but. Again, the longer you wait to take benefits up until age 70,
the more you generally get, another. Benefit of a bridge strategy is that
you can reduce your risk, and again, that's especially helpful in your later
years, so instead of relying on your investments and the markets to provide
the resources you need for the rest of your life, you can rely
on retirement income that happens to be, again, government guaranteed, inflation
adjusted, lifetime guaranteed, and all that stuff, while we might certainly
expect the markets to continue to mostly grow for the most part,
again with those inevitable market crashes and pull backs and stagnation
times and all of that, we might expect those to produce some decent
returns in the coming decades, but. There's really no guarantee, and if
you suffer from some bad timing, that can be especially bad,
so one way to think about this is to say, You know what,
I might go and spend down some of those assets and let that
benefit grow and that might work out just as well or better.
Next, if you happen to be married and there is a spouse who
might take over your retirement benefit, then waiting can be beneficial
for that person, so. When you pass away, let's say you've got a
higher retirement benefit from Social Security, your surviving spouse could
eventually effectively take over the bigger of their payment or the biggest
payment that you were entitled to at the time of your death,
and if you wait, if you delay claiming, let's say until age 70,
you have maximized your benefit and that will be the benefit that's available
to the surviving spouse, that can be really helpful because remember when
one of you goes, then only one Social Security payment is coming into
the household each month, there's less money to work with, Likewise,
the surviving spouse might be in a single tax filing status in future
years, and that just increases the burden that they might have if their
income is more or less similar to how it would have been,
again, that Social Security payment goes away, but if they're taking withdrawals
from accounts, then that can mess them up tax wise, and.
Speaking of taxes, this bridging strategy or waiting to claim benefits can
open the door to a number of different strategies and opportunities,
for example, if you stop working but you don't take benefits right away,
then you might have a number of years where you have a relatively
low income because you stopped earning your paycheck at work, and you're
not getting a Social Security payment during those years, you might be able
to maybe do Roth conversions, in other words, intentionally pay taxes on
some pre tax money in your IRAs and convert that to what could
potentially be tax free income in retirement. That could be really helpful
for you during those low income years when you are presumably in a
relatively low tax bracket, you might also just pull income out of those
pre tax accounts and spend it down. You might do that just to
spend what you need, or you might decide that there's a tax bracket
you're willing to go up to, then you could fill that tax bracket
at a rate that's acceptable to you. By. Doing either of those,
you're going to reduce the amount of money that you have in those
pre tax accounts, and that can be helpful later because it will reduce
the amount of your required minimum distributions or your RMDs, remember
at age 72[or later, or whatever lawmakers make the age after this video
gets recorded], the IRS requires that you take distributions out of those
pre tax accounts, that might end up having you pull out more than
you wanted and needed, it could potentially bump you up into high tax
brackets that you don't want to be in. It can also affect your
healthcare costs, so. The amount of income you show on your return can
impact how much you pay for Medicare, for example, if you go above
certain limits, then you are going to have to pay higher premiums for
your Part B and your Part D coverage in Medicare. So that's one
reason to consider trying to reduce the amount in those pre tax accounts,
so that in turn, you can reduce the amount you take in RMDs later
in life. Of course, nothing is perfect. Let's talk about some potential
pitfalls you might face if you decide to use a bridge strategy,
the. Most obvious one for people is that you have less money,
you're going to be spending down your assets, and that can seem quite
precarious, and it can actually cause problems if you end up just totally
wiping out everything you have saved for retirement, I don't necessarily
think it's a great idea to get rid of all of your retirement
savings just so you can get a bigger Social Security check,
it just depends on the numbers. You have to look at the details.
That said, having that cushion feels good for a lot of people,
so it could just cause you some anxiety and be unacceptable if it
means you're going to spend down way too much, there is also the
question of longevity, so if you have some known health issues and you
don't expect to live a long life, then it might not make sense
to delay taking your benefits, might make sense to claim as soon as
you can, let's say that's age 62 and get those payments coming in,
so that you can use the money and spend it and enjoy your
life. There's. Also the question of Maybe you want to keep that money
invested instead of drawing it out and spending it down, I would say
this is a risky one, that's on you if you want to go
that route, it's hard to outperform and it's certainly an unknown,
so who knows what will happen? But for some people, they just want to keep
that money invested and hopefully see it keep growing instead of spending
it down. I would point out this isn't necessarily a perfect calculation,
we're kind of looking at fuzzy lines here and ranges, but in order
for that investment strategy, that out performance strategy, to work out,
you might need to have some decent returns with higher expected returns,
again, no guarantees that anybody is going to get these... You would have
to take some risk to get these higher returns, then the strategy might
look better, but if you're a more conservative investor, the question becomes,
Are you going to get those types of returns and might it make
more sense just to hold off on taking Social Security and maybe spend
some of that money? You. Might also have some legacy goals,
so if you want to leave money to loved ones or to a
charity, then spending down those assets can seem like the wrong thing to
do. Now, what you want to do is maybe run some numbers,
because yes, you're going to be withdrawing at a high rate early on
before you take your Social Security benefits, but later in life you will
be taking presumably smaller withdrawals from your portfolio and that could
help to preserve it and possibly even grow it again, it just depends
on the details. We can't say for certain or generalize or anything like
that, but there's a possibility that you could still leave a decent and
maybe even better legacy for the people or causes you care about if
you use that bridging strategy, so don't necessarily rule it out if you
have legacy goals. So now let's get into maybe some ideas on how
to make this happen and improve the chances of it going well for
you first, we want to plan ahead for those low income years,
so when you stop working, you're not taking benefits yet, what are you
going to do during those years? Does that involve Roth conversions,
does it involve just taking out enough to get up to a certain
level for tax subsidies or ACA credits, when you buy health care insurance,
for example, what exactly is your plan during those years? You want to figure
that out ahead of time so that you're ready to put it into
action. We. Also want to know where you're going to pull money from,
so you need to have some assets available that are accessible and that
are invested appropriately for you to start taking withdrawals, and especially
if you retire early, that might even be before Social Security is an
option for you, you want to make sure you have accessible accounts or
some strategies that can help you get to that money, that might mean
taxable accounts, might mean Roth money, might mean a number of different
things, but again, look ahead and say, Where am I going to pull
that money from, which accounts will I use, which investments is the money
in right now, and is that the right investment? You also want to model
the draw down and figure out what it might look like,
like how low might your account balance get and are you comfortable with
that and is that a good idea? So run some numbers,
do some projections, some of them more optimistic. Some of them more pessimistic,
so that you can get an idea of how this thing might unfold,
of course, we can't predict the future perfectly, we can be vaguely right,
but we will be precisely wrong. And that's the best you can do.
So run those projections and just get an idea of whether or not
it looks reasonable to you. So, I hope you found this helpful.
If you did, please leave a quick thumbs up, thank you and take
care.