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Should You Use the Social Security Bridge Strategy?

A retirement strategy known as the Social Security bridge is one way to create an enlarged stream of guaranteed income without an annuity.

A retirement strategy known as the Social Security bridge is one way to create an enlarged stream of guaranteed income without an annuity.

When it comes to claiming Social Security, most retirees can’t wait to start collecting those checks. A 2020 report from the Bipartisan Policy Center found that more than 70% of Social Security beneficiaries currently claim their benefits before age 64. In fact, nearly 35% and 40% of men and women, respectively, claimed their benefits at age 62 in 2018. A financial advisor can help you make a plan for creating stable and reliable income in retirement.

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Delaying your benefits beyond full retirement age (FRA) will result in larger Social Security payments when the time comes to collect. A retirement strategy known as the Social Security bridge is one way to create an enlarged stream of guaranteed income without an annuity. Researchers at the Center for Retirement Research at Boston College recently examined this relatively unknown strategy and found that many workers would use it if given the opportunity.

The Social Security ‘Bridge’ Strategy Definition

A retired couple looks at a Social Security check together. A retirement strategy known as the Social Security bridge is one way to create an enlarged stream of guaranteed income without an annuity.

A retired couple looks at a Social Security check together. A retirement strategy known as the Social Security bridge is one way to create an enlarged stream of guaranteed income without an annuity.

The bridge strategy is a method for locking in higher lifetime Social Security benefits by using 401(k) assets as a stopgap. Instead of claiming Social Security immediately after leaving the workforce, a new retiree uses their 401(k) assets or other savings as a substitute for Social Security until age 70 when they can claim their largest possible benefit.

Delaying Social Security until the maximum claiming age (70) can increase a retiree’s benefits by 76% compared to claiming at age 62, according to Alica H. Munnell and Gal Wettstein of the Center for Retirement Research at Boston College. That’s because benefits increase by as much as 8% for every year they are delayed between FRA and age 70. On the flip side, claiming Social Security before reaching FRA diminishes a person’s benefit.

The bridge strategy capitalizes on this incentive and creates a larger stream of annuitized income.

“Using their 401(k) assets as a substitute for Social Security benefits when they retire – as a ‘bridge’ to delayed claiming – would allow participants, in essence, to buy a higher Social Security benefit,” Munnell and Wettstein wrote. “The potential for enhancing annuity income through Social Security is substantial, since the majority of retirees claim before their FRA and about 95 percent claim before age 70.”

And unlike a traditional annuity, Social Security benefits are adjusted annually for inflation to preserve a beneficiary’s purchasing power. Then again, a Social Security bridge may not be beneficial for people with shorter life expectancies. It will also reduce a person’s nest egg earlier in retirement and may diminish or completely deplete the inheritance they plan leave for loved ones.

Annuities vs. Social Security Bridge

An annuity is a contract you sign with an insurance company, whereby you pay a lump sum or make periodic payments in exchange for guaranteed payments at a later date. Although they are often considered expensive and complex, annuities can provide peace of mind to retirees who are worried they may outlive their savings.

“Although annuities would ensure higher levels of lifetime income, reduce the likelihood that people will outlive their resources, and alleviate some of the anxiety associated with most retirement investing, the market for annuity products is miniscule,” Munnell and Wettstein wrote, adding that academics have argued for decades that using retirement assets to purchase an annuity can mitigate longevity risk.

But the researchers noted that people are reluctant to exchange the 401(k) balances they’ve spent decades accumulating for a future income stream.

“Moreover, they often do not appreciate the insurance that annuities provide against running out of income, and tend to view the low expected returns associated with this service within an investment framework … The complexity of annuities and consumer distrust of insurance companies further reinforce biases against buying them as investments.”

Instead of using 401(k) assets to buy an annuity from an insurance company, the Social Security bridge strategy pays the retiree an amount equal to the Security benefits they would have claimed at retirement. By delaying Social Security until age 70, the retiree maximizes their eventual benefits and creates a larger stream of annuitized income.

Also, unlike payments from annuities, Social Security benefits are adjusted annually for inflation, which helps retirees protect their purchasing power.

“Purchasing additional Social Security income does not involve handing over accumulated assets to an insurance company, provides a familiar form of lifetime income that is adjusted for inflation, and does not expose the purchaser to higher costs from adverse selection,” Munnell and Wettstein wrote.

Should You Use the Bridge Strategy?

A caregiver walks alongside a man in a park. A retirement strategy known as the Social Security bridge is one way to create an enlarged stream of guaranteed income without an annuity.

A caregiver walks alongside a man in a park. A retirement strategy known as the Social Security bridge is one way to create an enlarged stream of guaranteed income without an annuity.

To gauge this strategy, the Center for Retirement Research conducted an online survey in early 2021 that asked participants whether they would use an employer “bridge” plan that would automatically pay them an amount equal to their Social Security benefits from their 401(k) balance when they retire.

The survey, which was administered by the Nonpartisan and Objective Research Organization at the University of Chicago, polled 1,349 workers between the ages of 50 and 65 with at least $25,000 in their 401(k) accounts.

Researchers learned that despite the novelty of the strategy, a “substantial minority” of respondents said they would use the bridge. In fact, nearly 27% of participants who were given only a limited description of the concept said they would use it if offered by their employer.

The more information respondents were given about the Social Security bridge strategy, the most interested they were. Almost 33% reported a similar interest when the bridge option was framed as insurance with both its pros and cons explicitly explained. Thirty-five percent of the respondents who were given a thorough explanation of the mechanics of the bridge option said they would use it if offered the chance.

Meanwhile, over 31% of respondents said they would not opt out of the bridge option if it was their employer’s default offering.

“The results show that a substantial minority would be interested in the bridge option,” Munnell and Wettstein wrote. “Furthermore, individuals presented with the pros and cons of annuitization versus investment chose to allocate a small but meaningfully larger share of their assets to the bridge strategy.”

“More strikingly, those defaulted into the bridge option ended up allocating much more of their assets to the bridge,” they added.

Bottom Line

The Social Security bridge is a method for delaying Social Security benefits until age 70, whereby a retiree temporarily supports themselves using 401(k) assets or other savings. As a result of delaying their benefits until age 70, a retiree enhances their future payments by approximately 76% compared to claiming Social Security at the earliest possible time (age 62). The Center for Retirement Research at Boston College found that approximately a third of workers between 50 and 65 years old would use this strategy if their employer offered it.

Retirement Planning Tips

  • The 4% Rule is perhaps the most well-known rule of thumb when it comes to retirement planning. The strategy dictates that a retiree can withdraw 4% of their savings in the first year of retirement (adjusting subsequent withdrawals for inflation) and have enough money to last 30 years. However, researchers recently found the 4% Rule may be outdated. New research suggests that retirees following a fixed withdrawal strategy should only take out 3.3% of their savings in the first year.

  • A financial advisor can help you plan for retirement and devise a withdrawal strategy that meets your needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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