How Your Savings Can Get You a Bigger Social Security Payout

Instead of tapping into savings to bolster their future benefits, more people are claiming Social Security earlier, in large part over concerns about the program’s financial health, according to recent research by the Urban Institute and AARP. The latest annual report from Social Security’s trustees projects that the program’s trust funds will run short in 2034, leading to a 19 percent cut in benefits unless Congress acts to shore up the system.

Sprick says he’s confident lawmakers will act to avert such a shortfall. But whether or not you agree, it still likely makes sense to delay filing for Social Security until 70, he says. Even if overall benefits are reduced, that’s still when you’ll get your biggest possible monthly benefit. With those higher payments, he says, you ultimately may need less in savings for your given lifestyle or expenditure level.

“If [people] are looking at how to maximize the total amount of Social Security benefits that they will receive in the course of their retirement, delaying is almost always going to be better than claiming earlier,” Sprick says.

Another advantage of delaying Social Security is that it’s indexed to inflation. Unlike retirement and investment accounts, which are tied to the prices of stocks, bonds and commodities, Social Security payments rise with consumer prices through annual cost-of-living adjustments (COLAs).

Past COLAs are rolled into the benefit you get when you claim, and the bigger that benefit, the more it will grow with future COLAs. “We financial advisers can’t give a guaranteed increase in returns” like that, Roop says.

Budgeting for a bridge

Is a bridge strategy right for you? Your overall health and longevity are crucial factors to consider. If you have, or are at risk for, any chronic medical conditions, you may want to preserve more of your savings for mounting medical costs. The BPC study notes that concern about future health or long-term care needs is one of the chief reasons many retirees want to keep accumulating assets rather than depleting them.

“Part of the analysis of whether it’s good for you to do it is you have to take into account what you have on the horizon,” Johnston says. For example, he asks clients if they have long-term care insurance. If the answer is yes, having a sizable emergency fund might be less of a priority since the policy will cover some care costs.

You can apply a similar test — less savings versus more guaranteed income — to other retirement and estate plans, Johnston says. “What are your travel plans? Do you want to leave money to your kids? Do you plan to sell your house?” he asks.

If globetrotting or a big inheritance are priorities, for example, you might want to leave your nest egg more or less intact. But selling a home can restore assets you’ve drawn down as part of a bridge strategy.

Equally important is how much you’ll spend on regular living expenses and how much you’ll need to withdraw from retirement accounts to cover them during the bridge period. According to the Bureau of Labor Statistics’ most recent Consumer Expenditure Survey, Americans 65-plus spend about $60,000 a year, on average, on food, shelter, utilities, health care and other routine costs.

The key to the bridge strategy is that the difference between what you get from Social Security and what you need from other sources to meet your spending needs narrows considerably the later benefits are claimed.

Take a hypothetical worker categorized by Social Security as a medium earner (average annual income of about $66,000 in today’s dollars) who aims to replace 80 percent of their income in retirement, a standard target recommended by financial planners. According to Sprick’s study, they would use up less of their assets over the course of retirement by using savings rather than Social Security to cover their “unmet need” for income in the early years of retirement.

If they live to an average life expectancy or beyond, the report says, the greater benefit would more than compensate for the early drawdown.

Taxing questions

There are other considerations, notably the tax implications of large withdrawals from retirement accounts.

For example, you’ll pay federal income tax on all the money you take out of traditional IRAs and 401(k)s (qualified withdrawals from Roth accounts are not taxable), whereas you’ll never pay taxes on more than 85 percent of your Social Security income. (Most beneficiaries are taxed on less than that, or not at all.) In addition, 37 states tax retirement account distributions, and only nine tax Social Security. That’s something else to factor into your budgeting for a bridge strategy.

Keep in mind, however, that you can’t hoard money in retirement accounts forever, no matter your strategy for balancing savings and Social Security. IRS rules generally require retirees to make a minimum withdrawal annually from traditional IRAs and 401(k)s starting at age 73.

The amount of these required minimum distributions, or RMDs, is determined by your age, life expectancy and the value of your retirement savings. They are taxable as income, and failing to take one in full can trigger an additional 25 percent tax penalty.

“For those people who have really large 401(k) and IRA plans, they have a little bit of this ticking tax time bomb,” Johnston says. All the better reason for the bridge plan, he says, because tapping into this money earlier “reduces your RMDs later on.”

The decline of workplace pensions as a pillar of retirement security, at least in the private sector, increases the importance of guaranteed income streams such as Social Security, the BPC report notes. Research has shown that most U.S. adults are unsure of, or underestimate, their life expectancy and don’t have a plan for mitigating the “longevity risk” of outliving their money, the BPC study found.

Addressing that through a bridge strategy “requires turning a lump sum that you’ve spent your entire life accumulating into an income stream, and that’s really scary,” Sprick says. “But if you’re looking at how you maximize the total amount of Social Security benefits that you will receive in the course of your retirement, delaying claiming to maximize your monthly benefit is still almost always the right call.”