How to fill the gap between retirement, Social Security

Jeff Witz, CFP

I am looking to retire next year at age 60, but I don’t want to take Social Security until age 70 when my benefit maxes out. What is the best way to bridge the income gap between when I retire and when Social Security kicks in?

It is common for individuals or couples who do not “need” Social Security immediately to delay taking their benefits to maximize payouts. To do this, they need to find ways to fund their lifestyle while they wait to reach age 70. There are many ways you can fund this income gap, and some are more effective than others.

Taking Social Security at different ages changes the benefit amount paid out to you. Normal retirement age depends on the year you were born but currently falls between ages 65 and 67. If you claim Social Security at your full retirement age, you are entitled to 100% of your Social Security benefits. However, you can choose to claim your benefit before your full retirement age at a reduced amount, or you can delay claiming your benefit beyond your full retirement age and receive greater than 100%.

The earliest someone can start claiming their benefits is age 62. If you start claiming benefits at age 62, your benefit will be reduced to 75% of your entire monthly benefit, assuming a full retirement age of 66. In other words, you will get 25% less income per month. Claiming early is usually only advisable in situations of financial hardship, when a stream of income is needed immediately.

The longest you can delay past your full retirement age is age 70. For each year you delay taking your benefit, you will increase your eventual payout by 8% compounded. Delaying claiming your benefit from your full retirement age until age 70 can significantly and permanently increase your Social Security income and financial security. By delaying from full retirement age 66 to age 70, you can increase your Social Security benefit to 136% of your normal retirement age benefit.

Waiting until age 70 to claim your Social Security benefit is no easy task, but there are some ways you can bridge the income gap created by delaying:

Work part-time. Many physicians slowly phase themselves into retirement. Would your employer allow you to work reduced hours or, if you own your own practice, can you reduce your workload? Looking for a new challenge? Explore new fields of interest. A 2009 study found that people who pursued post-retirement bridge employment in their previous fields reported better mental and physical health than those who retired fully.

Exhaust cash. This is straightforward. If you have cash saved up beyond your emergency fund, using this cash to fund your lifestyle can be an effective strategy.

Make withdrawals from pretax retirement accounts. Social Securitymay be a taxable benefit. You may need to include it in your income and pay taxes on it. By delaying, you have less income, which may result in you being in a lower tax bracket. You can then make distributions from your pretax retirement accounts, such as 401(k)s and traditional individual retirement accounts, while minimizing the tax impact. Additionally, with these pretax accounts, at age 72 you will be required to start taking required minimum distributions (RMDs). This is when the Internal Revenue Service forces a percentage of your balance to be distributed. In some cases, this distribution can amount to substantially more income than you need and potentially push you into a higher tax bracket. Lowering the balance of these retirement accounts during this income bridge period can reduce the size of RMDs later that may otherwise put you in an inconvenient position.

Tax loss harvesting. If you have an investment that has lost value, you can sell that investment to capture the loss. You can then use that captured loss to offset gains in another investment that you sell. Not only is this good tax management, but the two sales will also generate cash you can use as income.

Overall, delaying Social Security can lead to a significant increase in benefits and can provide an extra layer of long-term financial security. To bridge the income gap this strategy creates, you will need to be smart about how you generate cash to maintain your lifestyle. Some of the techniques we discussed take significant planning to execute correctly. For this reason, we recommend you consult your financial advisor or tax professional before taking action.

Reference

1. Wang M, Zhan Y, Liu S, Shultz K. Bridge Employment and Retirees’ Health: A Longitudinal Investigation. J Occup Health Psychol. 2009;14(4):374-389.

The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice. If you would like assistance with your individual investment strategy, please email witz@mediqus.com.