Before Collecting Social Security Early – Read This

We’ve recently had a client insist he’d like to retire early – AND collect his Social Security now. 

It’s not uncommon to hear this, as many individuals are concerned about both the long-term future of this specific government program, and their own life expectancy. Much like anyone, he wanted to maximize his Social Security benefit. 

But this strategy comes at a cost. That cost is longevity – and the waiting benefits Social Security can offer.

Enter: The Social Security Bridge Strategy.

This strategy is executed by delaying your Social Security benefits, allowing them to grow, increasing the amount you’ll receive later in life. But how do you bridge the income gap between early retirement and the start of Social Security benefits? 

In this post, we’ll break down the Bridge Strategy, explain how to implement it, and show you how you can use your savings to fill that gap.

What Is the Social Security Bridge Strategy?

The Social Security Bridge Strategy is a financial approach that allows you to retire earlier than you would otherwise be able to, without reducing your future Social Security benefits. 

The strategy involves using your savings, such as your 401(k) or other investment accounts, to cover living expenses between the time you retire and when you begin collecting Social Security benefits. 

By doing this, you can delay claiming your benefits and allow them to grow by 8% per year until you reach Full Retirement Age (FRA) or even later.

Why Does Delaying Your Benefit Make Sense?

Delaying Social Security from age 62 to age 70 can increase your benefits by 8% each year. 

This means a larger monthly payment for the rest of your life and more money to enjoy in retirement. 

Let’s use our example from our client, Donald Donaldson.

His annual breakdown at each age is as follows:

• Donald at Age 62: $28,356
• Donald at FRA (A67): $40,512
• Donald at 70: $50,255

Donald is concerned he won’t get back what he put into Social Security. Leaving aside the fact that his spouse and her future plays a role (link to deciding when to collect SS), his own longevity is key.

If he decides to retire early, and collect early, he could be leaving significant cumulative benefits on the table. If he’d collect at Age 62 rather than Age 70, that’s up to $320,000+ of cumulative benefits at Age 95.

And yes, I know. I can already hear you saying “I won’t make it that long. Even if I do, what am I going to be doing at 95? I want to play golf when I’m 62, not 95!”

That’s why we feel a Bridge Strategy can help.

Social Security Bridge Strategy Example

Let’s apply this now to how this would work in conjunction with our investment portfolio, and look at a great time in the market, and one of the worst times. 

Donald’s Benefits were given above, but let’s say he’s 62 now, and has a $1M portfolio. 

He’s looking for $70k of income each year, whether from his IRA or from his SS benefit. 

Here is a breakdown of portfolio income in either scenario:

As we can see – if Donald retires early, he is able to blend his portfolio income with his Social Security Benefit to make his $70,000 income. 

But in the Full Retirement Age Scenario, Donald has the 5 years of income coming directly from his portfolio. 

If you’re wondering what that does to Donald’s portfolio you’re asking the right question.

Sample 1 – A Historic Correction

As we know, timing makes a huge difference when retiring. Sequence of Returns risk is one of the greatest risks that could make or break a retirement income plan. 

If Donald were to be invested in a sample 60/40 portfolio, how would the portfolio stack up if he utilizes the Social Security sample above? Let’s utilize an example just after the start of the Global Financial Crisis of 2007-2009.

The First Breakdown is an early Social Security Strategy (Age 62).

The second chart is a Bridge Strategy, which would take the income he would’ve received as an early filer and take that from his portfolio instead:

As predicted, the portfolio will take a hit in either scenario, but the delayed example takes a noticeable decline.

Due to the early stress on the portfolio, delaying the Social Security strategy will lead to a portfolio that will lag behind. 

There are costs to collecting early though, which we’ll discuss briefly. But in this case, collecting early would relieve some of the stress on the retirement account.

Sample 2 – A Rosier Time in the Market

We must recognize that if Donald would’ve been born 5 years later, his picture could look much different. Let’s run the figures if he were to consider this in 2013. 

Here is the example of Donald collecting early again:

And if Donald were to delay:

As we can see from the chart below, in this market environment, the distance is far less noticeable:

While Donald would have more in his portfolio in either example if he collects early, we must also keep in mind the benefits of waiting. 

While we are only showing a 10 year forward projection, keep in mind that Donald’s Social Security Benefit will last his entire life. Therefore, the charts showing lifetime expectancy are far more impactful if he implements the bridge strategy in this second example.

Who Should Consider the Social Security Bridge Strategy?

This strategy works best for individuals or couples who meet the following criteria:

• Sufficient Savings: You have enough savings to cover several years of living expenses before Social Security kicks in.
• Healthy and Expecting Longevity: You’re in good health and expect to live longer than average, so delaying benefits will pay off in the long run.
• Maximizing Survivor Benefits: Delaying your benefit can also increase survivor benefits for a spouse, which could be an important factor if you’re married.

Potential Pitfalls of the Social Security Bridge Strategy

While the Social Security Bridge Strategy can be a great way to maximize your benefits, it is not a foolproof strategy. There are a few potential pitfalls to watch out for:

1. Running Out of Savings: If you don’t have enough saved to cover your expenses, you could run out of money before you begin receiving Social Security. Make sure you have a solid withdrawal plan in place.
2. Market Volatility: If your portfolio is heavily invested in stocks, market downturns could deplete your savings faster than expected. Consider moving to safer, more stable investments to reduce this risk, or collecting Social Security earlier. 
3. Tax Implications: Withdrawing from tax-deferred accounts, like a 401(k) or IRA, could push you into a higher tax bracket. Make sure you’re planning for the tax consequences of withdrawals.

Conclusion

The Social Security Bridge Strategy is a potential strategy that allows you to retire early without sacrificing the long-term security of your benefits. 

By tapping into your savings for a few years and delaying Social Security, you can enjoy higher monthly benefits and more financial security in retirement. 

With careful planning and the right withdrawal strategy, you can bridge the gap between early retirement and a more secure future.

If you’re considering retiring early and want help implementing this strategy, don’t hesitate to reach out. I’d be happy to help you build a plan tailored to your needs.