Social Security is a particularly valuable source of reliable retirement income. It functions much like a lifetime inflation-adjusted annuity backed by the federal government, providing income for as long as you live and adjusting benefits over time through cost-of-living increases. For married couples, the claiming decision can also affect the survivor benefit available after the first spouse dies. Unlike withdrawals from an investment portfolio, Social Security benefits are designed to continue for life, making Social Security particularly valuable for managing longevity risk.
Delaying Social Security can increase the amount of that reliable lifetime income. Benefits continue to earn delayed retirement credits after full retirement age until age 70. For someone with a full retirement age of 67, waiting until 70 increases the retirement benefit to 124% of the full retirement age amount. That higher benefit also serves as the basis for future cost-of-living adjustments. Waiting until age 70 can therefore be particularly attractive for someone who wants more reliable income later in retirement, wants to reduce the long-term demands placed on an investment portfolio, or wants to provide a larger potential survivor benefit for a spouse. But if retirement comes before age 70, there is a gap to address.
Because the right claiming age depends on your own income needs, marital status, and portfolio, it helps to work through that decision directly. Our Developing a Social Security Claiming Strategy workshop walks through the tradeoffs step by step, so you can decide with confidence before turning to how you would fund the years in between.
One approach is to take larger withdrawals from the investment portfolio until Social Security starts. That can fund the delay, but it can also expose the portfolio to additional risk during one of the most vulnerable periods of retirement. A Social Security bridge provides another option. Rather than relying on additional withdrawals from the long-term investment portfolio to cover spending while Social Security is delayed, you can identify assets specifically intended to provide that income in the interim.
The Problem with Taking More from Your Portfolio
A larger Social Security benefit can improve the long-term sustainability of a retirement plan, but delaying benefits can also put more pressure on the portfolio in the years before they start. That pressure is easy to underestimate because the higher withdrawals are temporary. The problem is when they occur. The first several years of retirement are especially important when managing sequence-of-returns risk. If larger withdrawals are also required to cover spending while Social Security is delayed, a retiree may be asking more from the portfolio at exactly the wrong time.
Consider someone who retires at 65 with a $2 million investment portfolio and expects to spend $100,000 per year. The retiree plans to delay claiming Social Security until age 70 and has identified a $40,000 annual income gap during those five years. Without a separate source of bridge funding, the full $100,000 would need to come from the investment portfolio, producing an initial withdrawal rate of 5%.
The higher withdrawal rate only lasts until Social Security begins, but the timing matters. Those larger withdrawals occur during the first five years of retirement, when poor market returns can have a disproportionate effect on the plan. This is the essence of sequence-of-returns risk. Poor returns early in retirement can be more damaging than the same poor returns later because withdrawals are occurring at the same time. Selling investments after a market decline leaves fewer assets available to participate in the eventual recovery.
Delaying Social Security may ultimately reduce the demands placed on the portfolio. But funding the waiting period entirely through larger portfolio withdrawals can create greater vulnerability along the way.
Give the Bridge a Funding Plan
The goal of a Social Security bridge is to provide the first few years of retirement with its own funding plan rather than asking the long-term portfolio to absorb the entire gap.
In our example, the retiree has identified a $40,000 annual income gap during the five years before Social Security is claimed. Over five years, that represents about $200,000 of spending that needs to be funded from a dedicated source.
Thinking about those dollars separately can change how the retirement portfolio is structured. In our example, assets could be allocated to cover the five-year bridge, while the remainder of the portfolio remains focused on the decades that may follow, including ongoing spending, inflation, discretionary goals, unexpected expenses, and potentially a legacy.
The amount that would need to be set aside depends on interest rates, taxes, the timing of withdrawals, and whether the planned income increases with inflation. The broader goal is to position money needed during the next five years for that near-term job, giving assets intended to support decades of retirement more opportunity to remain invested for long-term growth.
If stocks fall sharply at age 66, the retiree does not have to look at a declining portfolio and wonder which investments to sell to cover the income gap before Social Security begins. The bridge was built for that purpose. Meanwhile, the assets intended to support the next 20 or 30 years of retirement have more opportunity to remain invested and participate in a market recovery.
Building Your Bridge
There is no single way to build a Social Security bridge. The right approach depends on what role you want those dollars to play and how much certainty you want during the years before benefits begin. For some retirees, cash may be enough. In our example, setting aside enough to cover the expected $40,000 annual gap means the money is there when needed, regardless of what markets are doing. While cash may offer lower growth potential than long-term investments, the predictability can be valuable during the first few years of retirement.
Others may prefer to put more structure around the bridge by using a bond ladder. Bonds can be purchased with maturities that align with the years when income is needed, creating a series of planned cash flows rather than holding the entire amount in cash. Treasury securities can work particularly well when the goal is reliability, since the retiree knows when the principal is expected to be repaid and can match those maturities to upcoming spending needs.
For retirees concerned about inflation during the bridge period, TIPS can serve a similar purpose. Because their principal adjusts with changes in the Consumer Price Index, they can provide a bridge with some built-in inflation protection. Over a five-year period, that may or may not be necessary, but it gives the retiree another way to match the assets supporting the bridge with the type of risk they are trying to manage.
A period-certain annuity approaches the problem differently. Rather than setting aside a pool of assets and drawing from it over time, the retiree can purchase a stream of income for a fixed number of years. In our example, that could mean payments beginning at retirement and ending around age 70, when Social Security starts. The appeal is the reliability of the payment stream. The tradeoff is that the retiree is committing assets to the contract, so pricing and flexibility matter.
Home equity can also become a source of bridge funding, particularly for retirees who want to preserve investment assets during a market downturn. For qualified retirees, a reverse mortgage line of credit may help fund spending during the delay period, reducing the need to sell portfolio assets at an unfavorable time. That strategy introduces additional considerations, including borrowing costs, housing plans, and estate goals, so it tends to require more planning than cash or bonds.
Whichever approach is used, the objective is to identify the source of income before Social Security begins. The more clearly those dollars are matched to that job, the less pressure there may be to make investment decisions based on whatever the market happens to be doing at the time.
The Bridge Is Part of the Social Security Decision
Waiting to claim Social Security can improve the long-term structure of a retirement plan, but the years before benefits begin are part of that decision. The value of a larger future benefit should be considered alongside the cost of funding the waiting period.
Whether the bridge is built with cash, bonds, TIPS, a period-certain annuity, home equity, or some combination of these, the goal is to have a funding source in place before benefits start. What matters most is having a structure that supports the decision to wait. If Social Security is being delayed to create more reliable lifetime income later, the retirement plan should also provide a reliable way to get there. A well-designed bridge can help protect the portfolio during the years when sequence risk matters most.
Want to learn more? Listen to Episode 244 of the Retire With Style Podcast.
