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 TakeawaysExamination 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 SSBSSince
females generally live longer than males, implementing a SSBS will
generally be more financially favorable for females than malesSince
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 retirementNot all retirees will be able to afford to, or will want to, implement a SSBSIndividuals may disagree on the extent to which a SSBS will improve their financial well-beingLower real rates of return on invested assets favor SSBSWhile
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 BridgeIt
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 SSBSThe
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 Benefit1.Annual investment return / Inflation / LPP2.Present Value of immediate $13,369 annual Soc. Sec. benefit commencing at age 623. Present Value of deferred $30,000 annual Soc. Sec. benefit commencing at age 704.Ratio of Present Values(2) / (3) 5.Present Value at age 62 of Bridge Payments6.Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]4% / 3% / 31yrs$359,865$454,2731.26$183,2091.175% / 3% / 31yrs315,199381,0571.21177,3031.136% / 3% / 31yrs278,392321,4361.15171,7221.107% / 3% / 31yrs247,852272,6141.10166,4441.06  4% / 3% / 26yrs$468,000$572,6161.22$183,2091.165% / 3% / 26yrs415,142487,7211.17177,3031.126% / 3% / 26yrs370,645417,1201.13171,7221.097% / 3% / 26yrs332,991358,1641.08166,4441.05  4% / 3% / 19yrs$324,000$318,120.98$183,209.995% / 3% / 19yrs298,490281,540.94177,303.966% / 3% / 19yrs275,890249,657.90171,722.947% / 3% / 19yrs255,838221,810.87166,444.92Table
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 Benefit1.Annual investment return / Inflation / LPP2.Present Value of immediate $30,000 annual Soc. Sec. benefit commencing at age 623.Present Value of deferred $67,320 annual Soc. Sec. benefit commencing at age 704.Ratio of Present Values (2) / (3) 5.Present Value at age 62 of Bridge Payments6.Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]4% / 3% / 31yrs$807,536$1,019,3881.26$411,1081.175% / 3% / 31yrs707,307855,0921.21397,8551.136% / 3% / 31yrs624,711721,3021.15385,3321.107% / 3% / 31yrs556,179611,7461.10373,4881.06  4% / 3% / 26yrs$693,079$816,6361.18$411,1081.115% / 3% / 26yrs619,729699,9531.13397,8551.086% / 3% / 26yrs557,517602,2731.08385,3321.057% / 3% / 26yrs504,487520,1781.03373,4881.02  4% / 3% / 19yrs$523,260$515,813.99$411,108.995% / 3% / 19yrs482,073456,105.95397,855.976% / 3% / 19yrs445,670404,143.91385,332.957% / 3% / 19yrs413,401358,824.87373,488.93Table
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 671.Annual investment return / Inflation / LPP2.Present Value of immediate $15,096 annual Soc. Sec. benefit commencing at age 623.Present Value of deferred $25,000 annual Soc. Sec. benefit commencing at age 674.Ratio of Present Values (2) / (3) 5.Present Value at age 62 of Bridge Payments6.Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]4% / 3% / 31yrs$406,352$474,7171.17$105,7711.135% / 3% / 31yrs355,917404,6451.14103,7951.116% / 3% / 31yrs314,354347,1741.10101,8921.087% / 3% / 31yrs279,869299,7441.07100,0591.05  4% / 3% / 26yrs$348,757$392,4411.13$105,7711.105% / 3% / 26yrs311,848341,6901.10103,7951.076% / 3% / 26yrs280,543298,8731.07101,8921.057% / 3% / 26yrs253,858262,5861.03100,0591.02  4% / 3% / 19yrs$263,305$270,3681.03$105,7711.025% / 3% / 19yrs242,579242,738.1.00103,7951.006% / 3% / 19yrs224,261218,473.97101,892.987% / 3% / 19yrs208,023197,109.95100,059.96Table
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 701.Annual investment return / Inflation / LPP2.Present Value of immediate $22,141 annual Soc. Sec. benefit commencing at age 673. Present Value of deferred $30,000 annual Soc. Sec. benefit commencing at age 704.Ratio of Present Values (2) / (3) 5.Present Value at age 67 of Bridge Payments6.Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]4% / 3% / 31yrs$511,516$552,6921.08$81,5731.075% / 3% / 31yrs457,381486,3361.0680,8031.056% / 3% / 31yrs411,466430,1531.0580,0531.047% / 3% / 31yrs372,328382,3551.0379,3211.02  4% / 3% / 26yrs$422,862$442,7641.05$81,5731.045% / 3% / 26yrs386,222398,1011.0380,8031.036% / 3% / 26yrs354,220359,1701.0180,0531.017% / 3% / 26yrs326,173325,1231.0079,3211.00  4% / 3% / 19yrs$291,326$279,664.96$81,573.975% / 3% / 19yrs274,373259,411.9580,803.966% / 3% / 19yrs258,931241,014.9380,053.957% / 3% / 19yrs244,840224,273.9279,321.94Table
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 701.Annual investment return / Inflation / LPP2.Present Value of immediate $13,369 annual Soc. Sec. benefit commencing at age 62, 20% reduction at age 703. Present Value of deferred $24,000 annual Soc. Sec. benefit commencing at age 704.Ratio of Present Values (2) / (3) 5.Present Value at age 62 of Bridge Payments6.Adjusted Present Value Ratio [(2) + (5)]/[(3) + (5)]4% / 3% / 31yrs$308,572$363,4181.18$183,2091.115% / 3% / 31yrs272,174304,8461.12177,3031.076% / 3% / 31yrs242,098257,1491.06171,7221.047% / 3% / 31yrs217,071218,0911.00166,4441.00  4% / 3% / 26yrs$267,768$291,1361.09$183,2091.055% / 3% / 26yrs240,952249,5381.04177,3031.026% / 3% / 26yrs218,144214,714.98171,722.997% / 3% / 26yrs198,643185,447.93166,444.96  4% / 3% / 19yrs$207,228$183,891.89$183,209.945% / 3% / 19yrs191,878162,604.85177,303.926% / 3% / 19yrs178,270144,079.81171,722.907% / 3% / 19yrs166,170127,923.77166,444.89SummaryIn
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.