A Retirement Approach That Uses Cash Before Social Security

If you stop working at 67 but plan to wait until 70 to begin Social Security, you’ll need a way to cover about three years of expenses without those benefits. Some retirees prefer not to draw down savings, but delaying can pay off because claiming later generally leads to larger monthly checks.

This is where a bridge strategy can help. It allows retirees to live on cash first, hold off on Social Security, and potentially lock in a bigger lifetime benefit.

Why using cash first can work

Using cash for living costs before starting Social Security is a common retirement tactic aimed at boosting future benefit payments. For people worried about inflation or the possibility of outliving their assets, this approach can be especially appealing.

Social Security benefits rise with inflation each year. In addition, delaying your claim until as late as age 70 increases the amount you receive. Higher guaranteed income later can also reduce the need to tap investments as heavily once benefits begin.

Claiming earlier lowers your monthly payment, and in some cases that may still be the right choice. Even so, it’s worth weighing every option before making a decision.

Who it suits best, and when to be careful

This strategy is not the right fit for everyone. In some situations, filing for Social Security sooner is the better move. A bridge strategy is often most useful for people in good health, with a family history of longevity and enough savings to cover the gap.

By contrast, it may not work well for people with limited savings, health issues, high-interest debt or a pressing need for income. For married couples, the higher earner may want to wait as long as possible, since delaying can increase the survivor benefit if the lower-earning spouse lives longer.

It’s also important not to exhaust emergency savings entirely. Even if you eventually secure the highest Social Security benefit, leaving yourself with no buffer can create problems if an unexpected expense, such as a home repair, comes up.

Taxes, investments and withdrawal order

If you have several retirement accounts, the order in which you withdraw money can affect your tax bill. Relying on cash instead of a traditional IRA or 401(k) in the early years of the bridge can help keep taxes lower. But allowing traditional retirement savings to grow too large could lead to bigger required minimum distributions when you reach 75, assuming you were born in 1960 or later.

Roth IRA withdrawals are generally tax-free. If you expect your income to be higher later because of Social Security and 401(k) withdrawals, it may make sense to delay taking money from a Roth while using the bridge strategy.

The best withdrawal sequence depends on your age, account mix, tax situation, health and spending needs. A financial advisor may be able to help you determine the most suitable approach.