What Is the Social Security Bridge?
Social Security is the foundation of almost every financial plan. For many people’s entire careers, 6.2% of wages up to $142,800 (in today's dollars) plus a matching employer contribution (12.4% total) have been contributed to the Social Security trust funds - the Old Age & Survivors Insurance Trust and the Disability Insurance Trust. Over a 35 to 40-year career, this can be a lot of money! You can see how much you’ve precisely contributed to Social Security and Medicare by reviewing your annual statement delivered by mail or online by visiting https://www.ssa.gov/onlineservices/ - see example below.
The annual Social Security statement also includes an estimate of your benefits at various ages - 62 (early retirement age), 66-67 depending on birthdate (full retirement age), and 70 (delayed retirement age). Depending on when you decide to take Social Security, the amount will vary greatly. For example, the age 62 benefit amount is typically 30% lower than the full retirement age benefit. By comparison, the age 70 benefit is about 24% higher than the full retirement age amount.
If you work until age 70 or beyond, then deciding when to file for benefits may be easy. Age 70 provides the largest amount, including an 8% raise (“credit”) for each year you delay filing past your full retirement age. And if you’re still working, you may not need or want the extra income from Social Security until as late as possible.
But what if you walk away from work before age 62 - the earliest Social Security age?
What if you retire but want to consider delaying Social Security benefits until a later age?
Is there some way to replicate Social Security benefits before filing for benefits?
Yes there is! The Social Security Bridge strategy is designed for this purpose. A self-funded Bridge provides a secure amount of monthly income from the end of your career until your Social Security benefit date.
Constructing the Bridge
Let’s say Michael is 63 years old, has worked 40 years, and has a base salary of around $200,000. Michael is ready to retire and has an estimated full retirement benefit at age 67 of $36,000/year from Social Security. However, the idea of waiting for Social Security seems daunting, especially since Michael has a few bucket-list items to enjoy and anticipates higher medical expenses before Medicare. Michael has also heard that delaying Social Security until age 70 can be beneficial with an annual payment of $45,000. Michael's other option is to take an early but lesser Social Security benefit of $28,000 today. How can Michael build an income Bridge from retirement until taking Social Security?
We construct the Bridge to replicate Michael's Social Security benefit in two steps.
1- Calculate the Bridge Dimensions - how wide, how far?
How much income does Michael want each year? Let’s assume he wants to equalize his delayed Social Security benefit amount of $45,000.
Do we want to include higher medical expenses before Medicare, age 65? If yes, assume $1,000 per month or $12,000 per year.
How many years are we waiting for benefits? For Michael, he’s 63 years old and will wait seven years for Social Security and two years for Medicare. See below for calculating Michael’s Bridge.
2 - Purchase the Bridge Segments
Have you ever done a high rope challenge course? Our family has visited one in the Chicago area a couple of times https://www.goape.com/location/illinois-chicago/. Every time we go, my fear of heights nearly gets the best of me. Even with a harness and support cable, walking across a wobbly step-bridge can be a terrifying experience when you’re 30-feet in the air. By comparison, crossing a river on a structurally sound bridge built from the ground up is usually no problem.
Social Security is one of the safest sources of income in the world. For the Bridge, we want to build something safe and secure without having to harness, clip to a safety line, and hold on for dear life (HODL as the crypto crowd says).
Assets with a safe principal like cash, money markets, stable value funds, CDs, short-term bonds, US government bills/bonds, and types of annuities are viable options to fund the Bridge. Meanwhile, higher-risk investments like stocks and high-yield bonds are not a great fit.
In the example above, we can use a single asset $340,000 bucket. Or, we can purchase different investments for each 1-3 year period like CDs, bonds, or funds that mature at different dates. For example, individual asset blocks could be purchased for ages 63: cash, 64-66: CDs, and 67-69: bonds. Using individual blocks could be beneficial if interest rates are higher at later maturity dates. However, we must pay attention to those maturity dates. Dated investments must turn into cash when we step into a new year while crossing that Bridge to Social Security.
With the Social Security Bridge in place, Michael feels more secure about his first few years of retirement and confident in his Social Security timing decision. The Bridge is a valuable tool to fill the income gap from walking away from work to the age of guaranteed Social Security income. Anyone looking to retire early or delay Social Security may want to consider it for their plan as well.