Having a bridge strategy can help

Eligibility for Social Security retirement benefits starts at age 62.

But for prospective beneficiaries who can wait, the biggest benefit becomes available at age 70.

For many retirees, that poses a dilemma — how to fund those interim years while they wait to claim that highest monthly benefit check.

That may mean working longer for prospective beneficiaries who are able to do so.

Another option, for those who can afford it, may be to self-fund those interim years.

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Having such a “bridge strategy” can help protect retirement assets and manage the risk that a retiree may live longer than they expect, according to a new report from the Bipartisan Policy Center, a think tank.

Experts generally agree that delaying Social Security retirement benefits typically provides the highest value.

“Social Security provides a guaranteed stream of inflation-protected income for as long as you live,” said Emerson Sprick, director of retirement and labor policy at the Bipartisan Policy Center. “The value of that is immense.”

Retirees may claim Social Security retirement benefits at age 62 — but their monthly benefits will be permanently reduced for doing so.

If they wait until their full retirement age — typically age 66 to 67, depending on their date of birth — they will receive 100% of the benefits they have earned.

But for every year they delay from full retirement age to age 70, they stand to boost their benefits by 8%, a return that is difficult to match elsewhere, such as in the stock market where there are no guarantees the money will go up.

Yet research shows many people do not wait until age 70 to claim Social Security retirement benefits.

While more than 90% of people would benefit from waiting until 70, only about 10% of beneficiaries do, according to a 2022 report from the National Bureau of Economic Research.

New data shows that not only will Social Security claims increase in 2025, but higher earners may also be claiming early, especially at age 62, according to an Urban Institute analysis of Social Security Administration disclosures.

The increases in claims may be due to several factors, including a large baby boom population becoming eligible for benefits, new efforts to notify spouses about benefit eligibility and new changes at the Social Security Administration that may have prompted “fear and confusion among applicants and beneficiaries,” according to the Urban Institute.

Those early claimants face steep benefit cuts.

A person who would be eligible for a $2,000 monthly benefit at full retirement age of 67 would instead receive just $1,400 per month if they claim at age 62 — a 30% permanent reduction, according to the Bipartisan Policy Center.

If instead that same individual waits until age 70, they would receive $2,480 per month — a 77% increase from their age 62 benefit, according to the Center.

By delaying benefits, most Americans receive a higher total sum from the program than if they claim early, according to the Bipartisan Policy Center.

In addition to increasing wealth, delaying also helps protect beneficiaries if they live longer than they expect. They not only start out with a higher monthly check, but that check is also regularly adjusted for inflation.

To be sure, not everyone can afford to wait to claim Social Security benefits. For certain situations, particularly if someone is in poor health, experts generally say claiming early makes sense.

Yet for those who can and want to delay their Social Security start date, having a “bridge strategy” — money to fund the interim years while delaying Social Security — can help ensure that beneficiaries do not miss those perks, according to the Bipartisan Policy Center.

Other retirement research has also pointed to the value of using bridge strategies to delay Social Security.

The best-case scenario is working until age 70, which can enable a prospective retiree to continue funding their investment portfolio while also delaying Social Security benefits, said Jason Kephart, senior principal for multi-asset strategy ratings at Morningstar.

For those who instead tap their portfolios early, that may ultimately result in higher lifetime spending over a 30-year retirement, according to Kephart’s research. A lower investment balance later in life due to later Social Security claiming may result in less money to pass on to heirs, Kephart said.

Prospective retirees may opt to withdraw funds from their investment portfolio as their bridge strategy.

However, that will require ongoing investment decisions including how much to withdraw. It may also open individuals to sequence of return risk if they begin taking that money in a down market, according to the Bipartisan Policy Center. Withdrawals during a market downturn not only reduce the size of a portfolio but also limit future growth.

Alternatively, aspiring retirees may turn to annuities as an interim funding strategy, although experts say that may also have drawbacks. Annuities require investors to part with a lump sum in return for a steady stream of income. For some investors, it may be too difficult to part ways with that money upfront.

Immediate annuities, which provide set payments for a defined period starting from the date of purchase, may provide the simplest option for a bridge strategy, according to the Bipartisan Policy Center. However, the value of that strategy may depend on interest rates when the annuity is purchased.

Deferred annuities, which provide set future payments based on certain interest rates and market conditions, may provide another way to fund a bridge strategy, according to the Bipartisan Policy Center. However, there is the risk that circumstances may change between the annuity purchase date and the start of the regular payments, the research notes.

For prospective retirees, it helps to consider bridge strategy options well before age 62, according to Sprick.

“The answer is having a good financial advisor,” Sprick said, as well as employer-provided information on the retirement income choices available.