social security

Mind the Gap If You Delay Social Security

Build an income stream if you plan to retire before you claim Social Security.

The longer you can delay claiming your Social Security benefit, the larger the benefit will be. That seems like a good enough reason to wait. But if you leave your job before you start collecting, you will need to dip into investments to bridge the income gap until higher benefits begin.


One option is to construct a ladder of certificates of deposit or bonds to provide a steady stream of guaranteed income until benefits kick in. Another is to buy an annuity for the gap years. A third is to tap an IRA or 401(k) every year.

With interest rates and returns so low on safe investments, you could get a big payoff in lifetime income by waiting to collect Social Security benefits, retirement researchers say. For every year you wait beyond full retirement age, typically 66 for people retiring now, your benefit will earn delayed retirement credits worth 8%, up until age 70. Claim at 62, and you'll receive just 75% of your full retirement age benefit. To bridge the income gap, consider these moves.

Build a ladder. To set up a stream of guaranteed income, you could ladder certificates of deposit or bonds. Let's say you need to cover $96,000 in Social Security income that you forgo by delaying from 66 to 70. Rather than taking money from a brokerage account and plowing it into money market funds for safety, you can build a ladder for a tiny bit of growth. Place $24,000 each into CDs with maturities of one, two, three and four years. As each CD matures, you will have money to pay for that year's expenses. The downside: Rates on a four-year CD recently topped out at 1.44%. You can also ladder Treasury bonds, but their yields are small as well—1.52% for a five-year bond.

With interest rates so low, you could build a ladder to cover the first two years. After that ladder matures, create another two-year ladder, and so on, until you have covered the gap. That way, you will not lock up your money if interest rates rise.

When you figure taxes on the ladder, remember that Uncle Sam may have been taking a bite from your Social Security if you hadn't delayed. If a ladder is held within a tax-deferred account, you'll owe tax on the withdrawal at your ordinary income tax rate. If a ladder is held in a taxable bank account, you will just pay tax on the interest earned. You can compare the tax bite to what you would have paid on your Social Security benefits if you had instead taken them in those years.

Buy an annuity. Consider buying an immediate annuity to cover just the gap years. The annuity can provide temporary income as well as extend the life of your nest egg, says Wade Pfau, a professor of retirement income at the American College, in Bryn Mawr, Pa. The tradeoff: You can't get your money back after you invest it.

In a recent study, Pfau looked at the impact on portfolio longevity over 30 years for a retiree claiming Social Security at 62. He then asked: What would happen if the retiree instead delayed benefits until 70 and invested money in an eight-year period certain annuity at age 62?

Pfau assumed the retiree would have a monthly "primary insurance amount," or PIA, of $2,500 at full retirement age. If he delayed until 70, he would get a payment of $3,300; if he claimed at 62, he'd get a reduced payment of $1,875 for life. The researcher also assumed that the retiree had $1 million in assets and wanted to spend $60,000 a year for life, adjusted for inflation.

If he wanted to delay until 70, the retiree would have to spend $172,970 for the eight-year annuity to match the monthly $1,875 income he would get if he had claimed at 62. Pfau found that by combining the annuity with delaying benefits, the beneficiary's nest egg would likely last longer than if he had claimed benefits early. For example, his research indicated a 10% chance of depleting the nest egg after 28 years with the delay-plus-annuity strategy, compared with 23 years for the early-claiming strategy. "Bridging income really helps," he says. For those who want to delay only four years from 66 to 70, Pfau says, "the story should be the same." Locking in income, he says, allows you to avoid selling investments early in retirement in a down market, which can shorten the life of the portfolio.

Use your portfolio. If you don't want to be stuck with low-yielding CDs or pay for an annuity, you can simply withdraw money from your retirement plan each year. In some circumstances, taking larger withdrawals from an IRA or 401(k) in the early years of retirement to delay Social Security can boost the portfolio's longevity, according to research by William Meyer and William Reichenstein, principals of consulting firm Social Security Solutions. (Kiplinger's has partnered with the firm. Go to for information on obtaining a customized report to maximize your own benefits.)

Reichenstein, a professor of finance at Baylor University, in Waco, Tex., compared the results of claiming benefits at 62, 66 and 70 for someone with a 401(k) of $700,000, a Social Security primary insurance amount of $1,500 and a 30-year life expectancy. The retiree needs $36,150 in inflation-adjusted, after-tax income, and the portfolio is assumed to grow at an inflation-adjusted rate of 1.22% a year. In all cases, the retiree leaves work at 62.

The research shows that the retiree's investment portfolio will last five years longer for each four-year period he delays benefits. If the retiree taps his retirement plan for bridge income until he collects benefits at 70, his 401(k) "goes down quickly during those first eight years, but then levels out," Reichenstein says. But he gets about $130,000 extra in spending money than if he had started benefits at 62, Reichenstein says. That enables him to boost his income if he wants or leave a larger bequest to his heirs.

To fund the income gap with the portfolio, Ben Barzideh, an adviser at Piershale Financial Group, in Crystal Lake, Ill., recommends investing in dividend-paying stocks. "Many stocks are giving dividend yields higher than bonds," he says. The dividends can keep income flowing even as the market fluctuates.

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