Can the Social Security Bridge strategy help me increase my retirement income?

Known as a “welfare bridge,” a retirement strategy is one way to create an expanded, non-annuity guaranteed income stream.

Known as a “welfare bridge,” a retirement strategy is one way to create an expanded, non-annuity guaranteed income stream.

When it comes to applying for 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 recipients currently claim their benefits under the age of 64. In fact, nearly 35% and 40% of men and women, respectively, claimed benefits at age 62 in 2018. A financial advisor can help you put together a plan to create a stable and secure retirement income. Find a trusted consultant today.

Deferring benefits after full retirement age (FRA) will increase Social Security payments when it’s time to collect them. Known as a “welfare bridge,” a retirement strategy is one way to create an expanded, non-annuity guaranteed income stream. Researchers at the Boston College Center for Retirement Research recently looked into this relatively unknown strategy and found that many workers would take it if given the opportunity.

Defining a Social Security Bridge Strategy

A retired couple looks at a Social Security check together.  Known as a “welfare bridge,” a retirement strategy is one way to create an expanded, non-annuity guaranteed income stream.

A retired couple looks at a Social Security check together. Known as a “welfare bridge,” a retirement strategy is one way to create an expanded, non-annuity guaranteed income stream.

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

According to Alika H. Mannell and Gal Wettstein of Boston College’s Center for Retirement Research, deferring Social Security until the maximum age of application (70) can increase a retiree’s benefits by 76% compared to receiving benefits at age 62. This is because benefits increase by as much as 8% for every year they linger between the FRA and age 70. On the other hand, applying for Social Security before reaching the FRA reduces a person’s benefit.

The bridge strategy takes advantage of this incentive and creates a larger annuity income stream.

“Using their 401(k) assets as a replacement for Social Security benefits at retirement—as a ‘bridge’ to a deferred application—would allow members to essentially buy higher Social Security benefits,” Mannell and Wettstein wrote. . “The potential for increased annuity income from Social Security is significant, as most retirees apply before they receive an FRA, and about 95 percent before age 70.”

And unlike a traditional annuity, Social Security benefits are adjusted annually for inflation to preserve the beneficiary’s purchasing power. On the other hand, a welfare bridge may be disadvantageous for people with shorter life expectancies. It will also reduce a person’s savings at an earlier age in retirement and may reduce or completely deplete the legacy he plans to leave for his loved ones.

Annuities vs. Social Security Bridge

An annuity is a contract you sign with an insurance company where 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 complicated, annuities can provide peace of mind to retirees who worry they might outlive their savings.

“While annuities would provide higher levels of income throughout life, reduce the likelihood that people will outlive their resources, and ease some of the anxiety associated with most retirement investments, the market for annuity products is negligible,” write Mannell and Wettstein, adding that scientists have argued for decades that using pension assets to buy an annuity can reduce the risk of longevity.

But the researchers noted that people are reluctant to trade 401(k) balances they’ve been accumulating for decades for a future source of income.

“Moreover, they often do not value the insurance that annuities provide against income depletion and tend to view the low expected returns associated with this service as part of an investment structure…The complexity of annuities and consumer distrust of insurance companies further reinforce prejudice against buying them in as an investment.”

Instead of using 401(k) assets to buy an annuity from an insurance company, an interim Social Security strategy pays the retiree an amount equal to the security benefit they would have received upon retirement. By postponing Social Security until age 70, the retiree maximizes their possible benefits and creates a larger annuity income stream.

In addition, unlike annuity payments, Social Security benefits are adjusted annually for inflation, which helps retirees protect their purchasing power.

“Purchasing additional Social Security income does not involve transferring accumulated assets to an insurance company, provides a familiar form of inflation-adjusted lifetime income, and does not subject the purchaser to higher costs due to adverse selection,” write Mannell and Wettstein.

Should you use the bridge strategy?

The teacher walks next to the man in the park.  Known as a “welfare bridge,” a retirement strategy is one way to create an expanded, non-annuity guaranteed income stream.

The teacher walks next to the man in the park. Known as a “welfare bridge,” a retirement strategy is one way to create an expanded, non-annuity guaranteed income stream.

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

The survey, conducted by the University of Chicago Nonpartisan and Objective Research Organization, included 1,349 workers aged 50 to 65 who had at least $25,000 in their 401(k) accounts.

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

The more information was provided to respondents about the welfare bridge strategy, the more interested they were. Nearly 33% reported similar interest when the bridge option was booked as insurance with an explicit explanation of both its pros and cons. Thirty-five percent of respondents who were given a detailed explanation of the bridge’s mechanism said they would use it if given the opportunity.

Meanwhile, more than 31% of respondents said they wouldn’t opt ​​out of the transition option if their employer offered it by default.

“The results indicate that a significant minority would be interested in the bridge option,” wrote Mannell and Wettstein. “Furthermore, people who were presented with the pros and cons of annuitizing versus investing chose to allocate a small but significantly larger proportion of their assets to a bridge strategy.”

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

Bottom line

A Social Security bridge is a method of deferring Social Security benefits up to age 70 in which a retiree temporarily supports himself using 401(k) assets or other savings. As a result of deferring benefits until age 70, a retiree increases their future benefits by about 76% compared to applying for Social Security at the earliest possible time (at age 62). The Boston College Center for Retirement Research found that about a third of workers aged 50 to 65 would use this strategy if their employer offered it.

Retirement Planning Tips

  • The 4% rule is perhaps the most famous rule of thumb when it comes to retirement planning. The strategy states that a retiree can withdraw 4% of their savings in their first year of retirement (adjusted for subsequent withdrawals to adjust for inflation) and have enough money to last 30 years. However, researchers have recently discovered that the 4% rule may be outdated. A new study shows that retirees on a fixed withdrawal strategy should only withdraw 3.3% of their savings in the first year.

  • A financial advisor can help you plan your retirement and develop a withdrawal strategy that suits your needs. Finding a qualified financial advisor is not difficult. The free SmartAsset tool matches you with up to three financial advisors who serve your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find a consultant to help you reach your financial goals, start now.

Photo Credit: ©iStock.com/mphillips007, ©iStock.com/Zinkevych, ©iStock.com/FredFroese

The post “Increase Your Social Security Retirement Benefits With This Bridge Strategy” first appeared on the SmartAsset Blog.

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