The Social Security Strategy That Starts With Spending Cash
If you retire at age 67 but opt to delay claiming Social Security until age 70, you’ll have a three-year gap before your government benefits kick in to help cover your expenses. While some individuals may be hesitant to dip into their savings during this period, waiting those extra years can enable you to maximize your Social Security benefits as delaying results in larger monthly checks.
Let’s delve into the bridge strategy that allows retirees to postpone claiming Social Security and secure higher monthly benefits for life.
Utilizing Cash First: A Wise Move
Spending cash on living expenses before tapping into Social Security is a popular strategy that can help retirees enhance their retirement income. This “bridge” strategy can be particularly beneficial for individuals concerned about outliving their savings or inflation eroding their purchasing power.
Social Security benefits are adjusted for inflation annually. Additionally, delaying your claim up to age 70 results in larger benefits. By securing higher benefits, you can reduce reliance on your investment portfolio once you reach 70.
Claiming Social Security early can diminish your benefits. While this may be the right choice for some based on their specific circumstances, it’s essential to weigh all available options.
Who Benefits from This Strategy and Who Should Proceed with Caution
The bridge strategy isn’t suitable for everyone. There are instances where accessing Social Security early may be more advantageous. This approach is often favorable for individuals with good health, family longevity, and sufficient savings to cover immediate expenses.
Conversely, if you have minimal savings, health issues, high-interest debt, or an urgent need for income, the bridge strategy may not be viable. For married couples, the higher-earning spouse may want to delay claiming Social Security until age 70 to secure a higher survivor benefit for the lower-earning spouse in the event of outliving the higher earner.
It’s crucial to avoid depleting your emergency savings entirely when implementing the bridge strategy. Even if you attain the maximum Social Security benefit, draining your savings leaves you vulnerable to unforeseen expenses like home repairs.
Tax Considerations, Investment Strategies, and Withdrawal Order
The withdrawal sequence from your various retirement accounts can impact your tax liability. Prioritizing cash over traditional IRAs or 401(k)s in the initial years of your bridge strategy can lower your tax burden. However, allowing your traditional retirement accounts to grow significantly may result in hefty required minimum distributions (RMDs) once you reach 75 (for those born in 1960 or later).
Roth IRA withdrawals are tax-free. If you anticipate higher income later in life due to Social Security and 401(k) withdrawals, delaying Roth IRA withdrawals during the bridge strategy implementation could be advantageous.
The optimal withdrawal order depends on factors such as your age, account types, taxes, health status, and spending requirements. Consulting a financial advisor to devise a tailored strategy is advisable.
