When you make your retirement plan, you must consider your Social Security strategy carefully. Social Security is a valuable income source for seniors, but far too many people don’t realize how much of an impact their decisions have on the benefits they collect.
In fact, there’s a little-known move you could make that could add over $100,000 to your retirement income, but only a small percentage of retirees take advantage of the opportunity.
If you think you may want to be one of them, read on to learn how the technique works and why planning ahead to do it is so important.
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Increase your Social Security
If you’re hoping for a bigger Social Security check, implementing the Social Security bridge strategy could be the best way to get it.
This strategy is a simple one: You must wait to claim your Social Security benefits until 70 while living on savings or other income sources in the meantime.
Your savings or other income can bridge the gap from the time you retire until you finally claim Social Security at 70. And when you do finally claim, your monthly benefit is going to be much bigger thanks to delaying.
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The bridge strategy
So, how does the bridge strategy work? Let’s say that your full retirement age is 67 and you’d be entitled to a standard benefit of $2,200, but you’re thinking of retiring at 65 when you become eligible for Medicare.
If you follow a bridge strategy, you’ll go ahead and retire at 65, but you’d live off savings or investments without Social Security and wait to claim retirement benefits until 70. Your standard $2,200 monthly benefit would have shrunk due to early filing penalties if you’d claimed at 65, declining by around 13.33% and leaving you with a monthly payment of $1,906.67.
But by waiting until 70, you increase it instead due to late filing credits. You end up with a 24% bonus and a monthly benefit of $2,728. That’s $821.33 more per month.
Over $100,000 in extra lifetime income
Increasing your monthly income is nice, but it’s not the biggest win of the Social Security bridge strategy. The biggest win is that the odds are in your favor that you’ll end up with more lifetime income. If you claim a benefit at 70 that’s $821 more per month than the one you’d have collected at 65, you end up with an extra $246,399 in Social Security income if you live until 95 and you collect the $821 extra each month for 25 years.
Even if you factor in the five years of $1,906.67 payments you missed out on between ages 65 and 70, that’s only $114,400.20 of income lost due to delay. So you still end up with $131,999 in extra money you wouldn’t have had if you hadn’t waited, even after accounting for the income you missed. This data isn’t anecdotal either. The National Bureau of Economic Research reported that over 90% of workers aged 45 to 62 should wait until 70 to claim benefits, even though, right now, just 10.2% of people delay.
The NBER’s data shows the typical household passes up $182,370 in discretionary income because they don’t wait until 70 to claim benefits.
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The strategy also opens up the door to Roth conversions
There’s also another benefit to putting off your Social Security claim while living on savings. You’ll likely have a couple of lower-income years while you’re implementing the bridge strategy. And that means you’ll be in a lower tax bracket.
Those years present an optimum time to do a Roth conversion, which means strategically converting some of the money in tax-deferred traditional IRA and 401(k) plans into Roth accounts so you pay lower taxes on the conversion because of your lower tax rate.
This helps you reduce tax bills later in retirement by giving you more opportunities for tax-free withdrawals. It also allows you to take lower required minimum distributions (RMDs) later in life, since RMDs aren’t required from Roths.
Your spouse could also benefit big time
For married couples, there’s still one more big perk to the bridge strategy. If the higher earner delays their Social Security claim, this often ends up increasing survivor benefits too.
That’s because your spouse gets to keep your standard benefit, plus any delayed retirement credits that you’ve earned at the time of your death. Waiting until 70 maximizes your delayed retirement credits, and thus the survivor benefits your widow(er) gets to keep.
Preparing for this strategy
The problem with this strategy is you must have money to live on without claiming Social Security until 70, and that’s easier said than done. Saving and investing aggressively for retirement throughout your working life is essential to give you the funds and the flexibility to implement the bridge approach and hopefully get the big payoff it provides.
You’ll also want to make sure to invest those funds wisely and, since you’re going to rely heavily on your investment income to support you until Social Security comes through, should aim to make sure you have around three years of liquid assets ready to provide you with income in case of a badly timed market downturn so you don’t have to sell investments at the wrong time to get you over the bridge.
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Bottom line
If you are able to make this Social Security move work for you, you’ll likely end up with a lot more money as a retiree. Check up on your retirement readiness today to see if you’re saving and investing enough to fund the bridge strategy and truly make the most of your Social Security benefits as a retiree.
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