Social Security: Bridge

Social Security: Bridge

Wish I could take credit for this blog, but I must admit this concept came from an article a client sent me the other day.  I know a lot of people struggle with when to take Social Security.  There is a plethora of things to consider when collecting Social Security.  Although today’s blog focuses on one specific strategy it is important to note that you should really consult with your advisor and consider the specifics of your finances before choosing.

Ok, now that my public service announcement is complete let’s get into things shall we?  When considering Social Security some of the things worth thinking through are as follows.

What to consider when taking Social Security:

Life expectancy-

Now I know no one has a crystal ball, but we do have a family history and a decent understanding if we are super healthy or have a myriad of health issues.  This is certainly relevant as you want as much ROI on what you’ve paid into SS.

Income-

If you are currently working this is something to consider when taking your benefit.  There are generally a handful of negative tax implications if at a certain age and both working and taking your Social Security benefit. 

Spouse status-

A big deciding factor should be your spousal situation.  Not only if you have one or not, but what is their benefit likely to be?  Remember if there is no working history for them there is a good chance, they’ll be collecting based not only on your earnings but when you take your benefit.

Investments & Expenses-

Another large consideration should be what your investment portfolio and family’s expenses tend to be.  This can help determine the appropriate timing and how long you may be able to wait in the first place.

The Bridge Strategy

Now that I’ve given you some fodder to chew on, I want to turn our attention to the topic at hand, the bridge strategy.  I want to preface again this isn’t a recommendation, but rather a strategy I more recently learned about that I felt worth sharing. 

The concept is simple.  For context, it is important to remember that you can start collecting at age 62, which is considered collecting early.  The latest you can collect, or I should say the maximum your benefit will be, is age 70.  Everyone has their Full Retirement Age (FRA) which is technically the age at which you can collect 100% of your stated benefits (66/67 typically).  If you collect early, you’ll be collecting roughly 70% of your benefit forever, albeit starting 4-5 years earlier.  Conversely, if you wait until age 70 to collect, you’ll be receiving roughly 132% of your FRA benefits.

The simple math is that every year you wait to take your benefits, they grow an additional 8%.  Here is where the bridge strategy comes into play.  Instead of taking SS early, which many tend to do, you can instead start to take money out of your IRA/401(k) at the same amount your SS benefit would be. 

This in turn has the same impact on your income as if you were to be taking SS.  The benefit here is by doing so you know your benefit is growing 8% year over year (ie ROI) until you turn it on.  The key of course is not to take more money than your SS benefit.  Additionally, it would behoove you to pull these funds from more conservative investments within your accounts, as they are much less likely to surpass the annual 8% rate of return needed to eclipse the SS growth. 

Example: Mrs. Jablowski’s SS benefit at age 62 is $2,572/mo and at age 70 would be $4,555/mo.  On Mrs. Jablowski’s 62nd birthday she instead of turning on her SS takes $2,572 each month out of her IRA and defers her SS.  She does this each year until age 70, in this example.  At age 70, she stopped taking out of her IRA and flipped on her SS benefit collecting a $4,555/mo benefit, and would have received 8% growth on her benefits all the while.

That my friends is what they call the bridge strategy for Social Security.  I personally find it quite interesting and can see circumstances where it would make sense and others where it wouldn’t.  In any event, I think it is an interesting one worth sharing as one more thing to consider in the age ole riddle of when is the optimal time to collect your Social Security.

Hope you all enjoyed this little nugget of knowledge and as always please stay wealthy, healthy, and happy.