Should You Build a Social Security Bridge?

This month, the Bipartisan Policy Center released “Hedging the Risk of a Longer-than-Expected Life—The Value of a Social Security Bridge Strategy” authored by Emerson Sprick. Among the report’s key findings, Mr. Sprick says,

“A well-designed bridge strategy can significantly enhance retirement security and improve retirees’ financial well-being.”

This post will discuss the automatic Social Security bridge strategy built into the Actuarial Financial Planner (AFP) models to see how significantly this strategy may enhance one’s retirement security. See our post of April 15, 2020 for more discussion of delaying claiming of Social Security benefits. We hope that this post will help retirees make better financial decisions regarding the timing of their Social Security benefit commencement.

Key Takeaways

Examination of the tables below led us to the following key takeaways regarding Social Security bridge strategies (SSBS)

• The longer you live, the more value to implementing a SSBS
• Since females generally live longer than males, implementing a SSBS will generally be more financially favorable for females than males
• Since higher paid workers generally live longer than lower-paid workers, implementing a SSBS will generally be more financially favorable for more wealthy rather than less wealthy individuals.
• Implementing a SSBS can involve the depletion of a significant portion of a household’s accumulated savings early in retirement
• Not all retirees will be able to afford to, or will want to, implement a SSBS
• Individuals may disagree on the extent to which a SSBS will improve their financial well-being
• Lower real rates of return on invested assets favor SSBS
• While the size of the Social Security benefit will affect the amount of accumulated savings required to Bridge until desired commencement, it has very little effect on the financial benefits of deferring (ignoring the impact of more favorable mortality noted above)
• It is more advantageous to implement a SSBS that defers commencement from age 62 to age 70 (or even to age 67) than one that defers commencement from age 67 to 70,
• It may still be advantageous to implement a SSBS today even if Social Security benefits are reduced by 20% across the board upon trust fund exhaustion.

Background and Using the Actuarial Financial Planner models to Build Your Bridge

It is almost always financially advantageous to keep working, keep saving and keep deferring commencement of one’s Social Security benefits (but not beyond age 70). What we are talking about in this post is ceasing employment, delaying claiming Social Security benefits that one might be eligible to receive and using accumulated household savings (or other sources of income) to “bridge” the period of deferral prior to one’s desired Social Security claiming age. If you (and your spouse) have already commenced your benefits (and are beyond the period for changing your election) or if you are over age 70, this post is not for you. 

If you are considering implementing a SSBS, the Actuarial Financial Planner models available in this website can be very helpful. To determine the present value and impact on your Funded Status of immediate commencement of your current Social Security benefit, simply enter the amount of the annual Social Security benefit in the appropriate cell (E(12) of the AFP for Single Retirees) and “0” as the deferral period (cell G(12)). The present value of this benefit under input assumptions is shown in the PV Calcs tab.

To determine the present value and impact on your Funded Status of deferring your Social Security benefit, simply enter the projected annual Social Security benefit at later commencement (including adjustments for different early retirement factors, late retirement factors and inflation during the deferral period) in cell E(12) and the number of years of deferral in cell G(12). 

The AFP can be used to calculate the present value of the annual bridge payments from your accumulated savings that are designed to increase by inflation each year ending with the projected deferred commencement age benefit. Of course, these calculations should be revisited annually to adjust for any changes in the projected benefit at desired commencement age. 

Following the process outlined above, the AFP will automatically develop your SSBS assuming you have sufficient assets to fund the bridge payments.

Example Tables of SSBS

The following tables use the AFP to develop and compare the present values of bridge strategies under various assumptions for the future, different commencement ages and different benefit amounts. All the tables assume 3% per annum future inflation increases. Lifetime planning periods were based on results from the Actuaries Longevity Illustrator for a non-smoking 62-year-old male in excellent health. For most of our tables, the 25% probability of survival from age 62 is 31 years (age 93), the 50% probability of survival is 26 years (age 88) and the 75% probability of survival is 19 years (age 81). Note that these survival probabilities differ slightly from those currently used by the AFP.

Table 1 shows present values of an immediate annual benefit of $13,369 payable at age 62 vs. present values of a deferred annual benefit payable at age 70. It also shows the present value at age 62 of the expected bridge payments during the eight-year deferral period. The adjusted present value ratio in column 6 shows the ratio of the two approaches recognizing that in order to be able defer commencement under the SSBS, the individual must also possess and is assumed to withdraw at least the present value of the bridge payments during the period of deferral. Note under the default assumptions (5% annual investment return/3% inflation and 31 years lifetime planning period) the adjusted ratio is 1.13 in favor of deferral, and the present value of the eight expected bridge payments is $177,303. Thus, if the hypothetical individual had exactly accumulated savings of $177,303 at age 62, his total annual real dollar lifetime income from Social Security plus his accumulated savings under the SSBS is expected to be 113% of his total annual real dollar income from Social Security plus his accumulated savings under the immediate age 62 commencement alternative.

Note that if our example individual has less than $177,303 in accumulated savings under these assumptions, he would not be able to afford to fully implement a bridge strategy. Also note that even if our example individual had accumulated savings of something like $500,000, the bridge payments in this example would diminish those assets by about 35% over the eight-year deferral period, so SSBS can require a substantial commitment to deploy a large portion of accumulated savings in the early years of retirement.

If the example individual had been a female, the lifetime planning periods would have been 34 years (25% probability of survival), 28 years (50% probability) and 22 years (75% probability). Under the default assumptions, the present value of her bridge payments would have been the same, but the adjusted present value ratio would have been 1.16 instead of 1.13.

Table 1. Commencement at age 62 vs. Commencement at age 70—Average Benefit

1. Annual investment return / Inflation / LPP	2. Present Value of immediate $13,369 annual Soc. Sec. benefit commencing at age 62	3. Present Value of deferred $30,000 annual Soc. Sec. benefit commencing at age 70	4. Ratio of Present Values (2) / (3)	5. Present Value at age 62 of Bridge Payments	6. Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]
4% / 3% / 31yrs	$359,865	$454,273	1.26	$183,209	1.17
5% / 3% / 31yrs	315,199	381,057	1.21	177,303	1.13
6% / 3% / 31yrs	278,392	321,436	1.15	171,722	1.10
7% / 3% / 31yrs	247,852	272,614	1.10	166,444	1.06
4% / 3% / 26yrs	$468,000	$572,616	1.22	$183,209	1.16
5% / 3% / 26yrs	415,142	487,721	1.17	177,303	1.12
6% / 3% / 26yrs	370,645	417,120	1.13	171,722	1.09
7% / 3% / 26yrs	332,991	358,164	1.08	166,444	1.05
4% / 3% / 19yrs	$324,000	$318,120	.98	$183,209	.99
5% / 3% / 19yrs	298,490	281,540	.94	177,303	.96
6% / 3% / 19yrs	275,890	249,657	.90	171,722	.94
7% / 3% / 19yrs	255,838	221,810	.87	166,444	.92

Table 2 shows the same eight-year SSBS for someone with a much higher Social Security benefit. While the results are similar, the present values of the bridge payments required during the deferral period are more substantial.

Table 2. Commencement at age 62 vs. commencement at age 70—High Benefit

1. Annual investment return / Inflation / LPP	2. Present Value of immediate $30,000 annual Soc. Sec. benefit commencing at age 62	3. Present Value of deferred $67,320 annual Soc. Sec. benefit commencing at age 70	4. Ratio of Present Values (2) / (3)	5. Present Value at age 62 of Bridge Payments	6. Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]
4% / 3% / 31yrs	$807,536	$1,019,388	1.26	$411,108	1.17
5% / 3% / 31yrs	707,307	855,092	1.21	397,855	1.13
6% / 3% / 31yrs	624,711	721,302	1.15	385,332	1.10
7% / 3% / 31yrs	556,179	611,746	1.10	373,488	1.06
4% / 3% / 26yrs	$693,079	$816,636	1.18	$411,108	1.11
5% / 3% / 26yrs	619,729	699,953	1.13	397,855	1.08
6% / 3% / 26yrs	557,517	602,273	1.08	385,332	1.05
7% / 3% / 26yrs	504,487	520,178	1.03	373,488	1.02
4% / 3% / 19yrs	$523,260	$515,813	.99	$411,108	.99
5% / 3% / 19yrs	482,073	456,105	.95	397,855	.97
6% / 3% / 19yrs	445,670	404,143	.91	385,332	.95
7% / 3% / 19yrs	413,401	358,824	.87	373,488	.93

Table 3 shows the SSBS comparisons for commencement at age 62 vs. commencement at age 67. These results are a little bit less than results for deferral all the way until age 70.

Table 3. Commencement at age 62 vs. commencement at age 67

1. Annual investment return / Inflation / LPP	2. Present Value of immediate $15,096 annual Soc. Sec. benefit commencing at age 62	3. Present Value of deferred $25,000 annual Soc. Sec. benefit commencing at age 67	4. Ratio of Present Values (2) / (3)	5. Present Value at age 62 of Bridge Payments	6. Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]
4% / 3% / 31yrs	$406,352	$474,717	1.17	$105,771	1.13
5% / 3% / 31yrs	355,917	404,645	1.14	103,795	1.11
6% / 3% / 31yrs	314,354	347,174	1.10	101,892	1.08
7% / 3% / 31yrs	279,869	299,744	1.07	100,059	1.05
4% / 3% / 26yrs	$348,757	$392,441	1.13	$105,771	1.10
5% / 3% / 26yrs	311,848	341,690	1.10	103,795	1.07
6% / 3% / 26yrs	280,543	298,873	1.07	101,892	1.05
7% / 3% / 26yrs	253,858	262,586	1.03	100,059	1.02
4% / 3% / 19yrs	$263,305	$270,368	1.03	$105,771	1.02
5% / 3% / 19yrs	242,579	242,738	.1.00	103,795	1.00
6% / 3% / 19yrs	224,261	218,473	.97	101,892	.98
7% / 3% / 19yrs	208,023	197,109	.95	100,059	.96

Table 4 shows SSBS results for commencement at age 67 vs commencement at age 70. These results show that the financial benefit of deferring the last three years is not as beneficial as deferring prior to Social Security normal retirement age (assumed to be age 67), but are still favorable for most sets of assumptions.

Table 4—Commencement at 67 vs. commencement at age 70

1. Annual investment return / Inflation / LPP	2. Present Value of immediate $22,141 annual Soc. Sec. benefit commencing at age 67	3. Present Value of deferred $30,000 annual Soc. Sec. benefit commencing at age 70	4. Ratio of Present Values (2) / (3)	5. Present Value at age 67 of Bridge Payments	6. Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]
4% / 3% / 31yrs	$511,516	$552,692	1.08	$81,573	1.07
5% / 3% / 31yrs	457,381	486,336	1.06	80,803	1.05
6% / 3% / 31yrs	411,466	430,153	1.05	80,053	1.04
7% / 3% / 31yrs	372,328	382,355	1.03	79,321	1.02
4% / 3% / 26yrs	$422,862	$442,764	1.05	$81,573	1.04
5% / 3% / 26yrs	386,222	398,101	1.03	80,803	1.03
6% / 3% / 26yrs	354,220	359,170	1.01	80,053	1.01
7% / 3% / 26yrs	326,173	325,123	1.00	79,321	1.00
4% / 3% / 19yrs	$291,326	$279,664	.96	$81,573	.97
5% / 3% / 19yrs	274,373	259,411	.95	80,803	.96
6% / 3% / 19yrs	258,931	241,014	.93	80,053	.95
7% / 3% / 19yrs	244,840	224,273	.92	79,321	.94

Table 5 attempts to address the question of whether SSBS will still work if Social Security benefits are cut by 20% across the board eight years from now, just when the SSBS strategy commences deferred benefits. The table shows that there still may be value in deferring under certain assumptions, but the value is reduced. 

Table 5—Commencement at age 62 vs. commencement at age 70 with 20% across-the-board decrease at age 70

1. Annual investment return / Inflation / LPP	2. Present Value of immediate $13,369 annual Soc. Sec. benefit commencing at age 62, 20% reduction at age 70	3. Present Value of deferred $24,000 annual Soc. Sec. benefit commencing at age 70	4. Ratio of Present Values (2) / (3)	5. Present Value at age 62 of Bridge Payments	6. Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]
4% / 3% / 31yrs	$308,572	$363,418	1.18	$183,209	1.11
5% / 3% / 31yrs	272,174	304,846	1.12	177,303	1.07
6% / 3% / 31yrs	242,098	257,149	1.06	171,722	1.04
7% / 3% / 31yrs	217,071	218,091	1.00	166,444	1.00
4% / 3% / 26yrs	$267,768	$291,136	1.09	$183,209	1.05
5% / 3% / 26yrs	240,952	249,538	1.04	177,303	1.02
6% / 3% / 26yrs	218,144	214,714	.98	171,722	.99
7% / 3% / 26yrs	198,643	185,447	.93	166,444	.96
4% / 3% / 19yrs	$207,228	$183,891	.89	$183,209	.94
5% / 3% / 19yrs	191,878	162,604	.85	177,303	.92
6% / 3% / 19yrs	178,270	144,079	.81	171,722	.90
7% / 3% / 19yrs	166,170	127,923	.77	166,444	.89

Summary

In Table 1, we showed that under our default assumptions, a 62-year-old man who is eligible to receive immediate annual Social Security payments of $13,369 must commit to withdrawing a present value of $177,303 from his accumulated savings over the next eight years to implement a Social Security Bridge strategy deferring commencement until age 70. If that is his entire accumulated savings, he can expect to receive annual payments from his savings plus his Social Security benefits totaling $23,683 in real dollars each year under the SSBS. If he decides instead to commence benefits immediately, he will take withdrawals gradually and he expects his total annual income under the non-deferral approach will be $20,889 in real dollars each year. Thus, the ratio of expected incomes under the two approaches is 1.13 in favor of the SSBS, and this difference translates into $233 per month in real dollars. 

A Social Security bridge strategy is probably a pretty good idea for individuals who have sufficient assets to easily fund their bridge payments, who need to beef up their floor portfolios and who have other accumulated savings invested in more risky assets. We agree with Mr. Sprick that it is probably a good idea to consult with a financial advisor before implementing a bridge strategy that will consume most of your accumulated savings over the bridge period.