Everything You Need to Know About Social Security Bridge Payments
Savings and growth of money are the two important pillars that support a happy retired life. Lack of any one aspect can disturb the harmony and lead to various difficulties. While saving is a habit, the advancement of money is dependent on the right investments and wise strategies. An important part of retirement funds comprises of Social Security benefits. In fact, in the U.S., 40% of retirees are dependent on their Social Security. However, given the increasing cost of living, Social Security benefits often fall short to adequately support retirement. Hence, maximizing this benefit and adopting a wise strategy, can allow the funds to multiply at a good rate. One effective way is to delay benefits to help them accumulate interest. This method is also known as Social Security bridge payments.
Here is everything that you need to know about Social Security bridge payments:
What are Social Security bridge payments?
Social Security bridge payment is a very effective mechanism that helps retirees delay withdrawing their Social Security benefits. In this strategy, the retiree uses a part of the retirement savings to temporarily replace the expected earnings from Social Security until the definite benefits are withdrawn. This method is very useful for people opting for early retirement, as well as for people who aim to grow their benefits by a considerable margin of 7-8% per annum.
For example: Consider a retiree (born after 1960) who, at the age of 61 in 2019, wishes to retire at the age of 62. Social Security benefits can be withdrawn at 62, but it is advisable to delay the withdrawal until the age of 70. If funds are withdrawn before the official retirement age – 67 years – the returns will be 30% lower than if withdrawn at full retirement age or later. At the age of 70, the collection of benefits will result in a 24% raise. So, if the retiree was to receive $2000 as PIA (Primary Insurance Amount, payable at full retirement age as Social Security), withdrawing at 62 would mean a loss of $600 a month. On the other hand, claiming it at 70 would imply an increase of $480 a month. This will lead to an overall rise of 77% by delaying.
Meanwhile, the retiree can use the retirement assets to support the current standard of living, while allowing the Social Security benefits to maximize by a certain percentage. This replacement of Social Security earnings with other retirement account savings such as the 401(k) account, etc. is known as a Social Security bridge payment.
Why build a Social Security bridge payment?
Many Americans can substitute their benefits with other retirement savings or funds to allow the Social Security amount to grow. By living on withdrawals, buffer assets such as 401(k) plans and individual retirement accounts (IRAs), etc., a retiree can add 7-8% to their Social Security check. An average retiree who can delay the withdrawals until the age of 70 can add more than 50% to the check. Hence, when compared with other options, a Social Security bridge payment stands tall. It is the most proficient use of retirement assets in the long-run.
However, in the U.S., only 5% of men and 7% of women delay their Social Security benefits until the age of 70. In fact, as per research, 35% of men and 40% of women tend to claim their benefits even before the official retirement age. The reason for this can be the lack of funds to support the postponement. Moreover, for older retirees with critical or serious health issues, claiming benefits is the right move. Overall, for those who can afford to wait for a longer period, the Social Security bridge payment is a very efficient strategy to allow their savings to flourish. Today, even markets do not offer similar returns without considerable risks. Moreover, the income is indexed to inflation, which is far better than annuities available in the market.
For example: A retiree born in 1940 postpones the collection of benefits beyond the official retirement age and receives a credit of 7% annually. This credit is also added with a Cost-of-Living Adjustment (COLA). For the year 2020, the beneficiaries will receive 1.6% COLA. Thereby for the retiree in 2020, the overall returns will be equivalent to 7 + 1.6%. This helps the person adjust the funds with the rising cost-of-living.
Who should delay Social Security payment?
Ideally, all retirees should delay their Social Security payments, unless suffering from a critical illness. In that case, the benefits are passed on to the surviving spouse.
The following people can consider postponing their collection to a later age:
- Financially sound retirees who do not solely rely on Social Security benefits.
- People that have strong retirement assets and can afford to live off them.
- Retirees who are confident of sustaining on interest earnings from investments.
- People who believe in their life longevity and expect to live beyond the age of 85.
- The high-income earner in a married couple since this will effectively replace the Widow’s Tax Penalty.
- Retirees that desire a tax planning window and have unrestricted admittance to 10 and 12% tax slabs.
How to build a Social Security bridge payment?
In all cases, a person claiming benefits early needs to fill the income gap. The most effective way to do so is to create and rely on bridge assets. Bridge assets can be classified as resources, savings, investments, or strategies, which will act as income substitutes. Therefore, allowing a person to actively enjoy retirement and fulfill all requirements until claiming the Social Security money.
Some bridge assets which can help delay the withdrawals are:
Human capital: As a form of bridge asset strategy, a retiree can take up a part-time job to support the lifestyle. This allows income at hand and also keeps one engaged.
Additional income: A person can rely on rentals, patent earnings, and other sources of passive income to be financially secured in retirement until the maximization of Social Security benefits.
Investments: Investments are considered the primary bridge assets that can successfully bear significant expenses in retirement. It would be wise to consider the options mentioned below to ensure that investments are fruitful:
- Choose a combination of cash deposits (CDs), bonds or multi-year guarantee annuities depending on interests.
- Opt for pension funds, annuities or a TIPS ladder that guarantee a certain income.
- Select immediate annuities, deferred annuities, or period annuities.
- Get secure exposure through preferred stocks, dividend stocks, convertible bonds, Real Estate Investment Trusts (REITs), etc.
- Bank on traditional IRAs or Roth IRAs.
- Secure other uncorrelated assets such as insurance with cash value, reverse mortgages, cash reserves, etc.
To sum it up
The Social Security benefit is generally not considered sufficient for supporting a comfortable retirement. However, if adjusted with financially prudent strategies such as bridge payments, retirees can make more of this source of income in their after-work years. Delaying Social Security payments increases the overall income for retirement. Not just that, it also adjusts the earnings for cost-of-living for the future. Overall, it is the most-efficient way to maximize and optimize benefits. To ensure optimal utilization of the strategy, consulting professional Financial Advisors can be a good option.