Use Your 401(k) to ‘Build a Bridge’ to Social Security

SECURE Act
Most Americans should employ a Social Security “bridge” using their retirement-plan assets to delay claiming until age 70, when benefits max out, according to new research that comes as the first wave of workers dependent on 401(k)s begins to retire.

A new white paper from the Center for Retirement Research at Boston College says that Americans should tap their 401(k) accounts to provide monthly income from the time they retire or at ages 60 to 69, roughly matching whatever amount they would receive from Social Security, says Barron’s in the article “How, and Why, to Build a Social Security ‘Bridge’ With Your 401(k).”

By front-loading withdrawals from 401(k) plans and IRA accounts until age 70, retirees can delay collecting Social Security benefits until they are able to claim the maximum amount. For each year that benefits are delayed, monthly Social Security benefits increase by 7% to 8%. The average retiree who can do without Social Security, will increase their monthly benefit by more than 50%, according to the white paper.

The study compared the overall performance of three strategies for annuitizing retirement assets: immediate annuities, advanced-life deferred annuities and the Social Security bridge strategy. The study was conducted by authors Alicia Munnell, the director of the Center for Retirement Research, Gal Wettstein, research economist and senior research advisor Wenliang Hou.

Using a model that includes data on mortality statistics, market risk and “consumption shocks,” like major health care costs, the authors concluded that for almost all Americans, the bridge option is the most efficient use of retirement assets.

To make this work, 401(k) plans should have front-loaded withdrawals to retiring people ages 60-69, as the default option. Seniors should have the choice to opt out of such a provision. However, the woman who led the study thinks it would be best if this was a default.

The study acknowledged that many newly retired people are reluctant to begin drawing down their 401(k) or IRA balances, fearing they will run out of money. With that money set aside, they typically start taking Social Security benefits. Many Americans simply lack the resources to delay taking Social Security. For those with serious health issues, taking Social Security sooner may be the right move.

However, for those who can afford the bridge strategy, this is the best way to buy more guaranteed income. Not everyone can defer their benefits, but the paper makes a strong case for this being the first choice. The bridge strategy allow retirees to buy more Social Security income by waiting. That income is actually superior to commercially available annuities, because it is indexed to inflation.

Reference: Barron’s (Nov. 6, 2019) “How, and Why, to Build a Social Security ‘Bridge’ With Your 401(k)”

 

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