The Social Security Strategy That Starts With Spending Down Cash First

If you retire at age 67 but don’t want to claim Social Security until age 70, you're facing three years before your government benefits can help cover your expenses. While some people may not feel comfortable digging into their savings, waiting those extra years can allow you to maximize Social Security since waiting results in larger checks.

Here’s what to know about the bridge strategy that lets retirees delay Social Security and secure higher monthly checks for life.

Why spending cash first can make sense

Spending cash on living expenses before claiming Social Security is a popular strategy that helps retirees secure higher checks in retirement. This “bridge” strategy can be especially valuable for people who are worried about outliving their savings or falling behind inflation.

Social Security is adjusted for inflation each year. Plus, the longer you wait to claim up to age 70, the larger your benefits. Securing higher benefits means you won’t have to tap into your investment portfolio as much once you turn 70.

Claiming Social Security earlier reduces your benefits. That may still be the best move for you depending on your specific situation, but it’s best to consider all your options.

Who this strategy works best for — and who should be cautious

The bridge strategy isn’t for everyone. Sometimes, it makes more sense to access Social Security as soon as you can. The bridge strategy often makes sense for people who have good health, longevity in their family and enough savings to cover near-term expenses.

However, if you have very little savings, the bridge strategy may not be feasible. This strategy also may not make sense for people who have health concerns, high-interest debt or an immediate need for income. If you are married, the higher earner may want to wait before claiming Social Security for as long as possible until age 70 because that can secure a higher survivor benefit if the lower-earning spouse outlives the higher-earning spouse.

It’s also important to avoid draining your emergency savings completely when using the bridge strategy. Even if you end up with the maximum Social Security benefit, you leave yourself vulnerable to surprise costs like home repairs if you deplete your savings.

Taxes, investments and the order of withdrawals

If you have multiple retirement accounts, the way you withdraw from each will affect your taxes. Leaning on cash instead of a traditional individual retirement account (IRA) or 401(k) during the initial years of your bridge strategy can reduce your tax bill. However, if you let your traditional retirement plan grow to a large amount, you leave yourself vulnerable to high required minimum distributions (RMDs) when you turn 75, assuming you were born in 1960 or later.

Withdrawals from Roth IRAs are tax-free. If you anticipate a much higher income later in life due to Social Security and 401(k) withdrawals, it may be best to hold off on Roth IRA withdrawals when implementing the bridge strategy.

The optimal withdrawal order depends on factors such as your age, account types, taxes, health and spending needs. You may want to consider working with a financial advisor to map out the right strategy for you.