NerdWallet: 'Bridge' your way to Social Security

Delaying the start of Social Security benefits is a powerful way for retirees to cope with inflation, survive bad investment markets and reduce the risk they'll run short of money. The advantages of waiting are so great that financial planners often recommend their clients tap other savings, such as retirement funds, to help them delay claiming.

Employers could increase their workers' financial security by offering a similar "bridge" strategy as part of 401(k)s and other workplace retirement plans, according to a study by the Center for Retirement Research at Boston College. The bridge strategy would tap a worker's retirement account to pay amounts roughly equal to the foregone Social Security checks.

People can create such bridges on their own, of course. If Social Security projects your benefit at age 62 will be $1,500 a month, for example, you could set up automatic monthly withdrawals of that amount from your 401(k) at retirement. But having an employer offer the option could make the process easier and encourage more people to delay, said Gal Wettstein, the center's senior research economist and co-author of the study.

The benefits of waiting are huge

Social Security benefits are incredibly valuable to retirees. Benefits are adjusted annually for inflation and, unlike retirement savings, can't be depleted by bad markets, bad investing decisions or bad luck.

People can claim Social Security retirement benefits at any time from ages 62 to 70. Starting before your full retirement age, which is currently between 66 and 67, typically means settling for a permanently reduced benefit. Delaying beyond full retirement age, by contrast, increases retirement benefits by 8% each year until your benefit maxes out at age 70.

Waiting until age 70 can increase your Social Security checks by at least 76% compared to starting at 62, Wettstein said.

"The higher monthly benefit means you have more guaranteed income, which will last you for the rest of your life," Wettstein said.

(By the way: Your Social Security benefits begin earning inflation adjustments starting at age 62, regardless of whether you've started receiving them, according to the Social Security Administration. So next year's 8.7% cost of living increase is no reason to speed up your application if you're able to hold off.)

Most people are still claiming too early

Copious research has shown most people are better off waiting to claim Social Security. It's particularly important for the higher earner in a married couple to delay, since that benefit determines what the survivor gets after the first spouse dies.

A study by economists from the Federal Reserve and Boston University found that "virtually all" U.S. workers ages 45 to 62 should wait beyond age 65 to claim, and 90% should wait until age 70, although only about 10% currently do. Claiming too early will cost the typical worker more than $182,000 in lifetime discretionary spending, the economists found.

The average claiming age inched up between 2008 and 2018, from 63.6 to 64.7 for men and from 63.6 to 64.6 for women, according to the Social Security Administration. Most people still claim their benefits before reaching their full retirement age, which means their benefits are permanently reduced.

Few retirement plans help with payout strategies

Many employers provide matches to encourage people to accumulate money for retirement, but few help with payout strategies when it's time to retire, Wettstein noted. A few offer the option to annuitize, which means turning some or all of the account balance over to an insurance company in exchange for a guaranteed stream of payments.

Most people don't much like the idea of giving up big chunks of their savings, Wettstein noted. His study presented an alternative -- the employer-provided bridge -- to a nationally representative sample of 1,349 people ages 50 to 65 who had not retired and who had at least $25,000 in their 401(k). The strategy would allow participants to use up to half of their retirement account balances to replace Social Security checks while they delayed claiming.

A "substantial minority" said they would use the strategy if offered, the researchers found. About 27% of those who were given a brief description of how it worked said they would use it. The percentage willing to use the strategy rose as participants were given more information, with 35% of those given the most complete explanation saying they would use it. In addition, 31% said they wouldn't opt out if their employer made the bridge strategy the default option.

Wettstein said to his knowledge no employers are currently offering a bridge strategy, but he hopes the research will spur some to consider it. Figuring out when to claim Social Security is daunting enough for the average worker, let alone deciding how and when to tap retirement funds, he said. An employer-provided bridge strategy could make waiting easier for many.

"If it's all set out for you in a way that is effortless, that is definitely attractive," Wettstein said.

The nationally representative survey of 1,349 respondents was conducted online in July 2021 by the NORC at the University of Chicago. Participants were ages 50 to 65, not retired, and had balances of at least $25,000 in their 401(k).

This column was provided to The Associated Press by the personal finance site NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and author of "Your Credit Score." Email: lweston@nerdwallet.com. Twitter: @lizweston.

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