A Retirement Tactic That Uses Cash First Before Delaying Social Security

If you retire at 67 but choose to wait until 70 to file for Social Security, you’ll need to cover about three years of expenses without those benefits. Some retirees prefer not to draw down savings, but delaying can boost lifetime benefits because the monthly check grows the longer you wait, up to age 70.

Here’s a look at the bridge strategy that can help retirees postpone Social Security while locking in larger monthly payments for life.

Why it can be smart to use cash first

Using cash to pay living expenses before starting Social Security is a common approach for retirees who want higher benefits later on. This bridge strategy can be especially useful for people concerned about savings lasting long enough or losing ground to inflation.

Social Security benefits rise with inflation each year. In addition, delaying benefits until age 70 increases the amount you receive. That can mean less need to draw from your investment portfolio once you begin collecting.

Starting benefits earlier will reduce the monthly amount. That may still be the right choice in some cases, but it is worth weighing every option.

Who may benefit most, and who should be careful

This approach is not a fit for everyone. In some situations, taking Social Security sooner makes more sense. It tends to work best for people in good health, with a family history of longevity and enough savings to cover expenses in the meantime.

On the other hand, people with limited savings may not be able to use this strategy. It may also be a poor fit for anyone dealing with health problems, costly debt or an urgent need for income. For married couples, the higher earner may want to delay as long as possible, since that can help secure a larger survivor benefit if the lower-earning spouse lives longer.

It is also important not to empty emergency savings entirely while using this method. Even if you end up with the maximum Social Security benefit, you could still face unexpected expenses such as home repairs if your cash reserves are gone.

Taxes, investments and withdrawal order

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

Withdrawals from Roth IRAs are tax-free. If you expect your income to be much higher later because of Social Security and 401(k) withdrawals, you may want to delay Roth IRA withdrawals while using the bridge strategy.

The best withdrawal sequence depends on your age, account types, tax situation, health and spending needs. Working with a financial advisor may help you build the right plan.