The Social Security Bridge Strategy

The Social Security Bridge Strategy

| April 08, 2022

With a Social Security bridge, instead of claiming Social Security benefits at age 62, assuming you are retired, you live off of other savings and investments, such as a 401(k).

The idea would be to have the funds you withdraw from your 401(k) plan or other savings, match the amount you would be receiving if you filed for Social Security benefits when they became available at age 62.

So for example, if your Social Security benefit at age 62 was $1,000, you would set up withdrawals on your 401(k) plan or other savings of $1,000 a month while delaying your Social Security payments.

In essence, what the retiree is doing is purchasing a much larger Social Security income simply by waiting to claim their benefit later, ideally at age 70, where they would get the maximum monthly benefit.

The bridge strategy is not necessarily the best choice for everyone, and the best way to calculate if it’s right for you is to use a good financial planning software to do the analysis (ex “Income Solver”).

In my experience the sweet spot for doing a bridge strategy in most cases, is someone who has investments and savings including 401(k)s, between $100,000 and $250,000.

Purchasing a higher Social Security income through a bridge strategy, besides giving you a secure income for the rest of your life, also has some other advantages.

It does not involve purchasing a pension income by handing over your accumulated assets to an insurance company, which would always run the risk of a reduction or loss of the income if the insurance company went bankrupt.

Also unlike most private pensions offered by large corporations, you have your Social Security income adjusted for inflation.  

There are some disadvantages of a Social Security bridge strategy.

For example if you end up depleting most or all of your investments and savings while waiting to take your Social Security later, you may not have much in the way of funds for an unexpected emergency.  

Also remember if you’re considering using withdrawals from investments and savings to replace the Social Security payment, the tax consequences will likely not be the same and adjustments should be made for this.

For example only 85% (or less) of your monthly Social Security payment is taxable depending on your income.

But withdrawals from a 401(k) plan are 100% taxable which means if you took the same amount out of the 401(k) as the amount of your Social Security payment, you’ll have less money after tax.

To remedy this you would need to increase the amount of money you’re withdrawing from the 401(k) so that the after-tax amount is the same as the after-tax amount of the Social Security payment.

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer, tax or financial professional. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.