Is a Social Security Bridge a Good Retirement Plan?

A Social Security bridge provides monthly income in place of Social Security and starts after you stop working.

A Social Security card sits alongside checks from the U.S. Treasury in Washington on Oct. 14, 2021. Kevin Dietsch/Getty Images

Financing retirement without drawing an early Social Security benefit is a bridging strategy that can improve your Social Security income. Deferring your Social Security benefit until you’re at full retirement age or 70 helps you lock in a higher, inflation-protected Social Security check for life. It can also help improve the financial outlook of a spouse.

Social Security penalizes those who claim benefits before age 70 by reducing benefits. So, postponing withdrawing Social Security early can make sense for many people. But does a Social Security bridge strategy work for everyone? There are several ways to go about it.

A Bridge Provides Monthly Income

A Social Security bridge provides monthly income in place of Social Security and starts after you stop working. You receive an actual monthly income while allowing your Social Security benefits to grow. The longer you delay starting Social Security, the larger the benefit.

Waiting to Withdraw Benefits

When deciding whether to start collecting Social Security benefits or start a bridging strategy, it’s important to run the numbers. They differ according to age.

According to the Social Security Administration, depending on the year you were born, you could reach full retirement age (FRA) at 66 or 67. But if you take early retirement and start drawing benefits before you reach your full retirement age, your benefits will be permanently reduced.

For example, those individuals born after 1960 have an FRA of 67. Based on a full monthly retirement benefit of $1,000, if they retire at 62, their benefit would be reduced by 30 percent to $700 per month. Their spouse’s benefits would be reduced by 35 percent to $325 monthly.

A thought-out Social Security bridge strategy allows you to postpone taking Social Security, so you’re not penalized, and instead, lets your benefit grow. It’s a bridge between your work and your retirement.

Bridge Strategy Using Retirement Accounts

One Social Security bridge option typically has retired workers who are 62 spend down funds from their defined-contribution retirement accounts before they claim Social Security. These accounts could be an IRA, 401(k) plan, etc.

The retirees withdraw funds roughly equal to their Social Security benefit while postponing taking Social Security. Basically, the individual is using retirement savings to buy a higher lifetime income stream. This higher income stream is guaranteed for the rest of their lives.

For example, if the recipients’ Social Security retirement benefit at age 62 is $2,572 a month, it would be $4,555 a month at age 70.

When they turn 62, instead of starting Social Security, they can take $2,572 out of their 401(k) every month and defer Social Security until 70. When they start Social Security at age 70, they stop withdrawing from their 401(k).

They would have received 8 percent growth on Social Security benefits annually. That may be higher than what their 401(k) would have reached.

A Social Security bridge strategy mitigates the risk that retirees and their spouses outlive their accumulated retirement savings. The higher Social Security benefit makes up the difference.

Use Annuities to Bridge the Gap

An annuity is another way to bridge the gap between not working and Social Security. It gives you a steady paycheck while you delay taking Social Security benefits.

You don’t need to purchase a lifetime annuity. If you’re retiring at 62, purchase an eight-year annuity if you want to start collecting Social Security at 70, or a five-year annuity if your FRA is 67.

When choosing a specific term, your monthly payments are typically higher than with a lifetime annuity. The shorter the term, the higher the monthly payments.

Annuities are insurance products that work similarly to a self-funded pension. Typically, with a bridge gap annuity strategy, many individuals go with a straightforward and no-frills single-premium immediate annuity.

According to Thrivent, an immediate annuity starts making payments within 12 months after depositing a lump sum.

A Tips Ladder Strategy Bridges the Gap

Purchasing a series of Treasury Inflation Protected Securities (TIPS) with different maturity dates creates a staggered stream of income over time. This strategy is called a TIPS ladder. The TIPS ladder provides income to fill the gap until Social Security payments start at FRA or 70.

For example, a 62-year-old who wants to delay collecting Social Security until age 70 would buy an eight-year TIPS ladder. The goal is for the TIPS ladder to provide an amount equal to what the Social Security payment would have been.

Pros and Cons of Social Security Bridging

The biggest pro is increasing your Social Security benefit for life. And once the Social Security benefit is maximized, it will take pressure off your retirement accounts.

Another pro is that it will lower your required minimum distribution (RMD) from retirement accounts, which the IRS mandates at age 73.

But there are potential downsides. If you’re not conservative with your spending in your 60s, it could set you up for cash shortages later in life.

You also must trust that the Social Security Administration will stay solvent and continue to pay the expected benefits.

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