A retirement strategy known as a Social Security bridge is one way to create a broad, guaranteed income stream without an annuity.
When it comes to Social Security claims, most retirees can’t wait to start collecting checks. A 2020 report from the Bipartisan Policy Center shows that more than 70% of Social Security beneficiaries will claim benefits before age 64. In fact, 29% of new retirees will claim their benefits. 62 years ago In 2022
Delaying your benefits any longer Full retirement age (FRA) results in larger Social Security payments when it comes time to collect. A retirement strategy known as a Social Security bridge is one way to create a large income stream without any guarantees. Allowance. Researchers at Center for Retirement Research at Boston College They recently researched this relatively unknown strategy and found that many employees would use it if given the chance.
Definition of the social security ‘bridge’ strategy
A retired couple collects a Social Security check together. A retirement strategy known as a Social Security bridge is one way to create a broad, guaranteed income stream without an annuity.
The bridge strategy is a method of locking in maximum lifetime Social Security benefits. 401(k) Properties such as parking. Instead of claiming Social Security immediately after leaving the workforce, a new retiree can use their 401(k) assets or other savings for Social Security until age 70 to receive the maximum benefit.
Delaying Social Security until the maximum claiming age (70) increases retirees’ benefits by 76 percent compared to claiming at age 62, according to Alika H. Munnell and Gal Wetstein of the Center for Retirement Research at Boston College. This is because benefits increase by 8 percent each year between the FRA and age 70. On the other hand, claiming Social Security before reaching FRA reduces a person’s benefits.
The bridging strategy capitalizes on this incentive and generates a large income stream.
“Using their 401(k) assets in lieu of Social Security benefits in retirement—as a ‘bridge’ to delayed claims—allows participants to buy essentially higher Social Security benefits,” Munnell and Wettstein wrote. “Since most retirees claim before FRA and 95 percent claim before age 70, the potential to increase annual income through Social Security is high.”
And unlike traditional annuities, they are Social Security benefits. The price is adjusted every year To protect the consumer’s purchasing power. Then again, Social Security bridging may not be useful for people with short life expectancies. It also reduces a person’s nest egg early in retirement and can reduce or destroy it completely Inheritance They have plans to leave for their loved ones.
Annuities vs. Social security bridge
An annuity is a contract you sign with an insurance company in which you pay a lump sum or make payments in exchange for future payments. Even if they are It is often considered expensive and complicatedannuities can provide peace of mind for retirees worried about extending their savings.
“Although annuities can ensure higher levels of lifetime income, reduce the likelihood of people outliving their assets, and alleviate some of the concerns associated with most retirement investments, the market for annuities is small,” Munnell and Wetstein write. They have argued for decades that using retirement assets to buy an annuity reduces longevity risk.
But the researchers noted that people are reluctant to change their 401(k) balances, where they’ve spent decades saving for future income.
“Furthermore, annuities often do not appreciate insurance against income shortfalls, and tend to view the low expected returns associated with this service as part of an investment framework… Insurance companies’ annuity complexity and lack of consumer confidence reinforce the bias.” He is buying them as investments.
Instead of using the Social Security bridge strategy to buy 401(k) assets from an insurance company, it pays the retiree an amount equal to the amount of Social Security benefits they can expect to receive in retirement. By delaying Social Security until age 70, the retiree maximizes benefits and creates a larger income stream.
Also, unlike annuities, Social Security benefits are adjusted for inflation each year, helping retirees maintain their purchasing power.
“Purchasing Supplemental Social Security income does not involve surrendering accumulated assets to an insurance company, provides a typical lifetime income adjusted for inflation, and does not expose the purchaser to higher costs from adverse selection,” write Munnell and Wettstein.
Consider using it SmartAsset’s free tool To be matched with up to three trusted advisors to discuss your Social Security strategy.
Should You Use a Bridge Strategy?
A caregiver walks with someone in a park. A retirement strategy known as a Social Security bridge is one way to create a broad, guaranteed income stream without an annuity.
To measure this strategy, the Center for Retirement Research conducted an online survey in early 2021 that asked participants whether they use an employer “bridge” plan that pays them an amount equal to their 401(k) balance in Social Security benefits. When you retire.
The survey, administered by the University of Chicago, a nonpartisan and objective research organization, surveyed 1,349 workers ages 50 to 65 with at least $25,000 in their 401(k) accounts.
Researchers said that despite the novelty of the strategy, “a very small number” of respondents use the bridge. In fact, if given only a limited explanation of the concept, about 27% of participants said they would use it if offered by their employer.
The more information respondents were given about the Social Security bridging strategy, the more interested they were. When the bridge option is framed as insurance, 33% have the same interest, with both pros and cons clearly explained. 35 percent of those who were given a detailed explanation of the mechanics of the bridge selection said they would use it if given the chance.
Meanwhile, more than 31% of respondents said they would not opt out of the bridge option if it were their employer’s default offer.
“The results show that a sizable minority will be interested in the bridge option,” Munnell and Wetstein said. “Furthermore, individuals presented with the pros and cons of pooling investments have chosen to allocate a small but meaningful portion of their assets to the bridge strategy.”
“Incredibly, those who didn’t vote for the bridge put a lot of their assets into the bridge,” he said.
Consider talking to a Financial advisor If you have questions about your own Social Security benefits.
Bottom line
A Social Security bridge is a way to delay Social Security benefits until age 70, whereby a retiree can temporarily support themselves by using 401(k) assets or other savings. By delaying benefits until age 70, a retiree can increase their future payments by about 76% compared to claiming Social Security when they can (age 62). According to the Center for Retirement Research at Boston College, one-third of workers between the ages of 50 and 65 would use this strategy if their employer offered it to them.
Retirement planning tips
of 4% rule It’s probably the most well-known rule of thumb when it comes to retirement planning. The strategy stipulates that a retiree can withdraw 4% of their savings in the first year of retirement (adjusting for inflation in subsequent withdrawals) and have enough money to last 30 years. However, researchers recently realized that the 4% rule may be outdated. A new study suggests Retirees who follow a steady withdrawal strategy need only withdraw 3.3% of their savings in the first year.
A financial advisor can help you plan for retirement and design a retirement strategy that meets your needs. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool It matches you with vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to determine which one you feel is right for you. If you’re ready to find an advisor to help you achieve your financial goals, Start now.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to high volatility, like the stock market. The trade-off is because the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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