Delaying the start of your Social Security retirement benefits can significantly increase your monthly benefits and lifetime earnings. But how do you pay the bills in the meantime? Using a 401(k) or other retirement savings as a “bridge” may be your best option. You can build your own bridge, but researchers suggest it may be more beneficial for employers to offer this option in the future. Here’s why, and how to build a bridge.
Delaying the start of Social Security benefits is a powerful way for retirees to combat inflation, weather bad investment markets, and reduce the risk of running out of money. The benefits of waiting are so great that financial her planners often encourage clients to leverage other savings, such as retirement benefits, to help delay billing.
A study by Boston College’s Center for Retirement Research found that employers increase employee financial security by offering similar “bridge” strategies as part of 401(k) and other workplace retirement plans can do. The bridging strategy would use workers’ retirement accounts to pay roughly the same amount as social security checks paid.
Of course, people can build such bridges themselves. For example, if Social Security projects $1,500 a month in benefits for her at age 62, he could set up a monthly automatic withdrawal of that amount from his 401(k) when he retires. But having employers provide options could make the process easier and encourage more people to procrastinate, said a senior research economist at the Center and co-author of the study. says Gal Wetstein.
The benefits of waiting are great.
Social security benefits are very valuable to retirees. The benefits are adjusted annually for inflation and, unlike retirement savings, are not depleted by bad markets, bad investment decisions, or bad luck.
People can claim Social Security retirement benefits anytime between the ages of 62 and 70. Starting before full retirement age, from when he’s 66 to when he’s 67 now, usually means settling on permanently reduced benefits. In contrast, delaying beyond full retirement age increases retirement benefits by 8% each year until he maxes out at age 70.
Waiting until age 70 can increase Social Security checks by at least 76% compared to starting at age 62, says Wettstein.
“Higher monthly benefits mean more guaranteed income, which will last for the rest of your life,” says Wettstein.
(By the way, according to the Social Security Administration, Social Security benefits start getting inflation-adjusted at age 62, regardless of whether you start receiving them. So next year’s 8.7% cost-of-living increase could be a reason to accelerate. No. If you can postpone, please submit an application.)
It’s too early for most people to claim
Numerous studies show that most people are better off waiting for Social Security claims. Deferring is especially important for high-income couples, as their benefits determine what survivors get after the death of their first spouse.
A study by the Federal Reserve and economists at Boston University found that “virtually all” U.S. workers between the ages of 45 and 62 should wait to claim after age 65, with 90% should wait until age 70, but currently only about 10% do so. Economists have found that premature billing costs a typical worker more than $182,000 in lifetime discretionary spending.
According to the Social Security Administration, the average billing age rose modestly from 2008 to 2018, from 63.6 to 64.7 for men and from 63.6 to 64.6 for women. Most people claim their benefits before reaching full retirement age. In other words, benefits are permanently reduced.
Few Retirement Plans Help Payout Strategies
Many employers offer Matches to encourage people to save for retirement, but few of them help with payment strategies when it comes time to retire. We offer annuity options, which means transferring some or all of your account balance to an insurance company in exchange for a stream of paid payments.
Most people don’t really like the idea of giving up most of their savings, says Wettstein. His study shows that he is not retired and has at least $25,000 in a 401(k) He is 50 to He is 65 For a nationally representative sample He is 1,349 , offered an alternative, an employer-provided bridge. This strategy allows participants to substitute up to half of their retirement account balance for Social Security checks while deferring claims.
Researchers found that a “significant minority” said they would adopt the strategy if offered. About 27% of those given a brief description of how it works said they would use it. As participants were given more information, the proportion willing to use the strategy increased, with 35% of his participants given the most complete descriptions saying they would use it. Additionally, 31% said they would not opt out if their employer made the bridge strategy their default option.
Wettstein says that to his knowledge, no employer currently offers a bridging strategy, but he hopes the study will provoke people to consider it. For the average worker, figuring out when to claim Social Security is extremely difficult, he says, let alone deciding when and how to use retirement benefits. Employer-provided bridge strategies can make waiting easier for many.
“When everything is set up in an effortless way, it’s definitely appealing,” says Wettstein.
The survey, which included 1,349 respondents representing the nation, was conducted online in July 2021 by NORC at the University of Chicago. Participants were age 50-65, not retired, and had at least $25,000 in balances on their 401(k).