972. Laura reviews why delaying your retirement benefit could make your nest egg last longer.
972. Laura reviews why delaying your retirement benefit could make your nest egg last longer.
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Welcome back to episode 972 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, my Substack newsletter. Free subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
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One of the most important financial decisions for most older Americans who qualify for Social Security retirement benefits is when to claim them. Your benefit can begin as early as 62, but delaying it to age 70 gives you a larger payment. This post will review what a retirement bridge strategy is and how it helps maximize your Social Security benefits.
First, what are Social Security retirement benefits?
Social Security is a U.S. federal program, created in 1935 to provide financial assistance to qualifying citizens who are retired, disabled, or survive a relative who received benefits. It was amended to include disability insurance, supplemental income, and Medicare benefits. But I’ll only discuss the retirement portion of the program here.
To be eligible for Social Security retirement, you must work and pay into the system for at least 40 quarters or 10 years. That’s because the program gets funded from payroll and self-employment (SE) taxes.
If you’re an employee, you’ve probably seen the deduction listed on your pay stub as OASDI, which stands for old-age, survivors, and disability insurance. But if you work for yourself, you must pay self-employment taxes, which are similar to the Social Security and Medicare taxes withheld from most workers’ paychecks. Workers and business owners pay into Social Security based on their incomes, and then receive benefits based on their earnings history.
But not everyone pays into the Social Security system. For instance, there are millions of state and local government workers, such as teachers, police officers, and firefighters, who qualify for a pension from their government employer rather than paying into and receiving Social Security retirement benefits.
How much is the Social Security retirement benefit?
Your estimated Social Security retirement benefit is based on the average of your highest 35 years of earnings. If you work fewer than 35 years, the missing years are counted as $0 income, which lowers your average.
If you work for over 35 years, only your highest-earning years are included in the benefit calculation. So, how long you work and how much you earn throughout your career determine your retirement benefits.
It’s important to remember that Social Security was created as a safety net or supplement, not to be a sole source of Americans’ retirement income. The average monthly benefit for January 2025 was just over $1,900. For a comfortable retirement, you likely need additional sources of income, such as savings, investments, or a workplace pension.
Since your future Social Security benefits play a significant role in your retirement, I recommend regularly reviewing your reported earnings for errors. You can visit SSA.gov to sign up for an online account, check your earnings history, and see your estimated future retirement income and other benefits. Any mistakes in your Social Security record could keep you from getting all the benefits you’re entitled to.
RELATED: Social Security’s future–fact vs fiction
When can you claim Social Security retirement benefits?
Everyone who qualifies for Social Security retirement benefits has a "full retirement age" or FRA, which is when you can claim full benefits. For instance, if you were born before 1959, your FRA is 65 or 66. But if you were born in 1960 or later, your FRA is 67.
If you claim benefits before your FRA, they get permanently reduced. According to the Social Security Administration, if you claim early retirement at 62, your benefit would be about 30% lower than if you started at your FRA of 67.
If you delay retirement benefits past your FRA, they increase 8% per year up to age 70. If you can wait until 70, you’ll receive a 77% larger monthly payment than if you claim early at 62. That’s a huge difference that gets locked in for life and is adjusted annually to keep up with inflation.
So, if you're in good health and can continue working or have other income sources, waiting to claim retirement benefits is an easy way to boost your lifetime income and financial security.
However, there are many factors to consider when deciding when to start retirement benefits, such as your income sources, life expectancy, and if you have a spouse, their situation. Always get personalized advice from a financial advisor to help you make the best decision.
What is a bridge strategy?
A bridge strategy is when you tap your nest egg for living expenses in retirement instead of claiming early benefits. This helps cover you in the early years of retirement, instead of claiming Social Security benefits immediately.
What are the pros and cons of a retirement bridge strategy?
If you have retirement savings and investments to tap in retirement, a bridge strategy can help you maximize your Social Security benefits.
As I mentioned, claiming at 70 means getting a 77% larger check for life than claiming at 62. If you live a long life, delaying retirement benefits until 70 will almost certainly pay off.
The downside of a bridge strategy is that once you spend investments or savings, they’re gone and no longer growing for you. Plus, if you don’t have a long life, delaying benefits could be a mistake if it impedes your ability to retire when or how you want.
To sum up, a retirement bridge strategy may be right for you if your health and expected longevity are good. In general, if you believe that you’ll live past 80 to 82, delaying Social Security will likely result in receiving more lifetime benefits.
But if you have any risk factors or chronic medical conditions, claiming early retirement benefits and preserving your savings for healthcare costs may be wise. The problem is that none of us can know what the future holds.
Another important issue is the health of the Social Security system, which is projected to have a shortfall starting in 2033, according to its latest report. While experts believe that lawmakers will act to shore up the system before that happens, more people than ever are claiming retirement benefits earlier. Some may have no other income sources, but some early claimants may worry that their future benefits won't be as generous.
LISTEN ALSO: Should I be worried about Social Security?
What taxes do retirees pay?
Another good reason to delay taking retirement benefits, especially if you’re still working, is that you may owe income tax if your “combined income” exceeds certain thresholds. Your combined income is the total of your gross income, tax-free interest, and 50% of your Social Security benefits.
For 2025, if you’re a single taxpayer with a combined income between $25,000 and $34,000, you may have to pay income tax on up to 50% of your retirement benefits. If you earn more, up to 85% of your benefits may be taxable.
If you’re married and file a joint tax return and you and your spouse have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your retirement benefits. Earning more means up to 85% of your benefits may be taxable.
In the future, it’s possible that up to 100% of retirement benefits could be taxable or that the wealthiest retirees could be taxed more to bring additional revenue into the Social Security system. But there’s no way to know what the program's future will be.
By using a bridge strategy and living only on your investments and savings until age 70, you might pay a high tax rate on distributions from tax-deferred retirement accounts (qualified withdrawals from Roth accounts are tax-free). However, once you turn 70 and begin receiving maximum retirement benefits, you could reduce your account withdrawals, lowering your taxable income.
No matter your strategy for balancing income from savings and retirement benefits, IRS rules require you to make a minimum withdrawal annually from traditional retirement accounts starting at age 73 (or 75 in 2033). Required minimum distributions (RMDs) are determined by your age, life expectancy, and value of your retirement accounts. Therefore, tapping your taxable retirement accounts earlier will reduce your RMDs later on.
A bridge strategy requires you to turn money you’ve been accumulating for decades into an income stream, which can feel scary. However, if your goal is to maximize the total amount of Social Security benefits you’re paid over your lifetime, delaying claiming is almost always wise.
Only you can decide whether having less savings or more guaranteed income is the best fit for your financial goals. Other factors to consider include how much you plan to spend in retirement, your potential investment growth, and whether you want to leave a legacy.
If you have questions or concerns about the timing of claiming Social Security benefits, speak with a certified financial planner specializing in retirement planning.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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