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I had lunch with some friends from my old company last week and we discussed their retirement plans. Many are delaying Social Security until FRA (full retirement) at age 67 or until age 70 to take advantage of the 24% increase over FRA. The conversation then turned to strategies to bridge the 2-5 year gap between retiring and applying for SS.
If you delayed or plan to delay Social Security, how did you/will you bridge the gap between retiring and applying for SS? For those already retired, anything you’d do different in hindsight?
Strategies to bridge the gap:
For those that are interested in reading more about TIPS ladders (mentioned in posts by William, Rob, and Randy below), here’s some links:
Four Easy Steps to Build a TIPS Ladderby Alan Roth 10/7/24
https://www.advisorperspectives.com/articles/2024/10/07/four-easy-steps-build-tips-ladder
The Pros and Cons of Building a TIPS Ladder for Retirement Income
by Rob Berger
https://www.youtube.com/watch?v=TeS64sZz4NA
Also check out Laura Kelly’s recent article for HD:
https://humbledollar.com/2024/09/laying-down-a-floor/
Combination of cash and stock that can be liquidated to provide income between when we stop working and we can tap retirement accounts and Social Security. The truth is we are considering taking Social Security earlier than FRA, because we plan on retiring at aged 57 from full time work. We are 53 now.
The missus is an RN who can probably easily find some PT work and I hope to pick up some consulting work to help extend our current savings between when we stop working FT and when we claim SS. Without going crazy working FT in semi retirement, the less we need to pull from cash and taxable accounts, the more we will delay taking Social Security.
do want to always keep at least 2 years of liquidity handy, so when we hit that mark, we will likely claim SS and start tapping some retirement accounts while doing Roth conversions.
Doing those three things in the same year may put you in a higher tax bracket. I’m doing Roth conversions since age 58, spending from taxable account until 70 when claiming Social Security and not tapping traditional accounts until RMDs at 75. A TIPS ladder will help bridge the gap.
Yes Randy, it is all about the calculations. We are taking SS early for sure, but remember we are planning on retiring from FT work at 57, and for that period through aged 62-63 we will likely manage our income to remain in that 12% bracket and do most of the Roth conversions then. Depending on how long the cash bucket holds out, we will delay SS until we deplete to about 2 years worth of expenses.
We will stop working for an income and even with SS still fit in some more conversions without waking the tax dogs too much. All of this is theoretical, but yes, the tax piece is something we will manage.
Good post Cheryl.
We plan to delay SS and our gap is much longer than 2-5 years. I have a military pension but it doesn’t cover everything. For the rest, I have some deferred compensation that’s still playing out for now though decreasing, we have some dividends in our taxable account, and we’re selling some stocks in our taxable account. I’m past 59.5 so could withdraw from retirement accounts but have no plans to.
Don’t think we’d change much if anything. In retrospect I might think more about taking 25% of my corporate pension benefit as an annuity rather than 100% lump sum. If I had done that, would we still be selling some stocks? I don’t know and it’s not worth it to go back and do the math to say. I do know our monthly payment would have been hit pretty hard by inflation the last three years, while our overall portfolio has grown in that time.
I suspect our numbers are probably better with the lump sum route we took, but I acknowledge there are some benefits to a monthly annuity payment that aren’t in the math. I don’t know that we’d do anything differently in the end, but would at least think more about this option.
Lots of thoughtful responses here — a good post and prompts, Cheryl.
I retired at 63 without a pension intending to wait until 70 for SS. In my last work years, I purposely accumulated a large checking balance for the first gap year. I also had an insurance payout that had converted to an interest-bearing account that, for years, paid above-market rate. When that dipped below market, I cashed out the account and the funds took me through the second gap year. That year too, I began working several hours a week in a lab. Although not in my original plan, the job provides a welcome mental workout, modest financial supplement, and social interaction. Now in my third gap year, I am withdrawing from my 403b, maxing out on the tax-free limit that my state allows and minimizing future RMDs; I supplement as needed from a taxable account and plan to follow this approach for the next four gap years.
I could have followed a far simpler course and enjoyed a monthly “paycheck” by annuitizing my 403b upon retirement. That would have replaced my pre-retirement income and then some, but in my situation would not have been tax efficient. As a person without children or close relatives, maintaining sizable savings seems prudent. I hope not to need them and to leave them to charity.
I am 78 years old and according to R Quinn, and Oxford Dictionary I am NOT retired. OK, then I have been semi-retired since I was 48. The quick story, I was downsized, because my company wanted to replace me with someone earning 60% of my salary. So I am a very lucky #1 from above. I started my own consulting business with my wife. But mostly I did sales for a friend’s company and started with no customers. In 2 years built that to 200 customers. And you say, how could I be semi-retired. Well, because I worked from home with a fax machine and computer, and a lively telephone and a lot of email, remember dial up, phone and modem! But semi-retired, yes. I travelled anywhere in the world and an 8000 mile car trip to the Northwest USA and many others, all with my laptop and Wi-Fi, because my fax machine was done via email. I often took off for 30 to 60 days at our Table Rock Lake condo. Well, it is 30 years later and I have 3 customers, and will RETIRE on 12-31-2024. Hooray! My point about retirement is you do it YOUR way. I delayed my Social Security to 70 and we took my wife’s at 65, maximized as best we could. RMD’s kicked in for me at 70.5, and utilize those funds as my income declined. I have collected my $1000 per month pension since I was 55 and it will last our lifetimes until we both pass. I have had lots of practice being retired and am enjoying much time with friends and family all over the good ole USA. I am gratefully thankful for my company semi-retiring me early, the best thing to happen to my career. God Bless us ALL.
I retired in 2000 at 53, and I wrote an article about how it worked out. My pension, plus retiree medical, started the day I retired, although my pension has no COLA and is worth substantially less today. I worked part-time off and on for a few years. I had a healthy balance in my Vanguard money market account, which went up and down over the years. I was able to draw spousal Social Security at FRA, which helped me wait to take my own at 70.
Most important: I was living well below my income when I retired, at which point I paid off my mortgage, stopped saving for retirement and saw my tax bill drop.
Withdraw from an IRA or 401k to keep taxes down, and rescue the principal when having to take RMD’s. So, #4 then #3. Most do not have pensions so that doesn’t apply to many
Good article. 1 and 10 here. 1-part time consulting. Being transparent it was not something that was planned and we very likely would have been fine without the income but it sure has helped in a few areas… I just found after I retired from my megacorp at 62, I wasn’t ready to stop working completely-that was 6+ years ago. The income is variable but we haven’t had to draw anything from our portfolio and in fact allowed my wife and I to both buy QLACs in June even while doing some significant travel, buying a new car and putting on a small addition to our house. 10-a 10-year rolling TIPs ladder which will be maintained throughout retirement with the amount of TIPs adjusted to the gap between projected income and expenses.
You answered your own question.
Having a list is a start, but the HD community is great about discussing the ‘whys’ of their decision(s), how well it worked for them, and things they would do different.
I retired at 62 and am starting wife’s SS at 65 and mine (higher wage earner) at 70. Have started a couple small pensions and are using #’s 3-6 to supplement spending needs. Doing some Roth conversions to fill up 12% bracket. I monitor the portfolio enough to ensure the projected balance will never fall below an amount I feel we need for contingencies.
The one thing I would have done differently is put more money into a Roth IRA instead of a traditional IRA (or started Roth conversions earlier). Having more funds available for tax-free withdrawals prior to starting Medicare can help you qualify for more Premium Tax Credit for insurance purchased from the Healthcare Exchange.
Same here – I did contribute to Roth IRAs, but I wish I would have invested more in my Roth 401K even if it was just a two or three thousand a year.
My husband and I both retired in our 50s (now 59 & 61). We benefit greatly from my husbands military service. As a military retiree (23 yrs Air Force) the pension, and included health care are huge for early retirees. Military pensions begin at the time of retiring from the service thus this started when he was 42 and has a COLA. An amount of VA disability pay (tax free) also started a couple years ago. Combining this with a substantial taxable savings amount that generates significant passive income covers our expenses. We manage the taxable savings such that we sell an amount each year to take full advantage of the 0% rate and a bit of the 15%, and drop it into a money market so that we have a significant amount for travel/home improvements etc.
A good list to consider. On #10 we are in the process of building a rolling TIPS ladder to protect against unexpected inflation for the majority of the bond/cash part of our retirement portfolio in lieu of nominal bonds or CD’s. We have decided upon a 10 year rolling ladder that will start being spent when the first of us dies.
I did not stop working full-time until I reached age 72.
I haven’t invested in TIPS, but keep meaning to look into it, so I’m glad you mentioned TIPS. Out of habit, I’ve parked my extra cash in CDs over the last few years.
You brought up a point that doesn’t get discussed much, i.e., setting aside a fund that can be spent ‘when the first of us dies’. Really tough to think about and easy to put off. We decided to set up an annuity to replace the second Social Security check so the surviving spouse doesn’t have to sell stocks. Just change the start date on the annuity.
Kudos to you for working until 72!
Cheryl, great topic. We’ve done a little of 1-6, &8. Mostly 8. As mentioned below, we executed the split claiming strategy – my wife claimed SS at 65 while I’m planning to wait to 70.
Our situation was similar – we did 1,2, and 8. My husband claimed SS at 65. I was going to retire at 67, but COVID happened, and my company required employees to work from home. For me, it was a great way to transition into retirement. One year turned into three years and I claimed SS at age 70.
We were fortunate enough to inherit money that we have used for funding early retirement the past five years, and me a small pension the past two years.
But also we spend about 50-60K for expenses (we don’t have a budget) we are frugal and paid off our mortgage and owned both of our vehicles.
We have enough left of the inheritance to pay two more years of expenses then will have to start drawing from our portfolio for one additional year before I can claim SS at 70, and my wife the following year at 70 as well.
Even with that being said our portfolio has only dropped 100K since retiring, and our net worth has increased about 100 K since we retired despite buying two new cars.
Believe me when I say I calculate both portfolio value and net worth quarterly to make sure that we are not losing any significant ground on a year to year basis. If that were to occur we could always claim my wife’s SS at FRA next December to minimize portfolio drawdowns.
Well thought out plan with zero debt and stretching your inheritance to cover 7 years of expenses. Just curious, are you planning any Roth conversions?
In the process of hopefully converting all of my wife’s IRA while maximizing the 12% tax bracket before she turns 70 and claims SS. Have been using mostly my father’s RMDs to pay the taxes, and some of my taxable brokerage account. Have been using my mother’s Roth money that runs out this year to supplement other taxable income. Have not had to touch our portfolios at all during this time.
Converting all of her IRA has three reasons: 1) here’s is the smaller IRA, 2) given her familial longevity it is likely she will live to 100+, 3) this way I will only have to take RMDs from my account when I turn 73.
Also her Roth is 100% in the Vanguard Total World ETF (VT), as it will only be tapped if my IRA is completely emptied which is highly unlikely. If this works out as planned these funds will grow for 30-40 years and our two children will inherit the money tax free. It will make me smile when it happens despite my being in another world.
Again my wife and I are truly blessed that we inherited this money from my father and mother, both of which were the first generation in our family history to be able to bequeath significant funds to their children.
I think my parents would be proud of how I have utilized their hard earned money!
I was just going to say that! You are making sure their estate benefits future generations which is a heartfelt tribute to your parents.
Thank you for explaining your plans re: Roth conversions – very helpful. My husband converted most of his Trad IRA to Roth. I just started my Roth conversions 2 years ago and will continue to fill up the 12% bracket going forward. (Wish there was a bracket between 12% and 22%.) I earmarked some savings to pay the taxes, but it will only cover a few years.
“Earmarked some savings to pay the taxes, but it will only cover a few years”.
Please be aware that the general consensus is that if you have to use some of the proceeds from the Roth conversion to pay the taxes for it, that is not advised as it will take a significant amount of time just to break even, thus negating some of the benefit of the conversion.
Thanks David – I don’t know if it will be worthwhile to do Roth conversions once I start taking RMDs at 73. I’ll look at that again especially if there are tax changes.
I have often thought the old saw that the two certainties in life being death and taxes should be modified to be “and changes in the tax laws”.
What are you doing retiring before SS FRA if you have to do any of those things, especially 9 and 1 Wouldn’t you be doing the others anyway unless you are planning on living on SS alone?,
Perhaps Cheryl has ample assets to make it work; we do not know her situation.
However, here is my cautionary tale. About 18 years back the auto companies were offering $70k buyouts. People were taking the money and giving up their $100k jobs. The company supplemented their pension until age 62 when they could get at their Social Security.
So by accepting the buyouts they ended up with fewer defined benefit pension credits and reduced SS. Many are still working little jobs to make the ends meet.
Like I wrote below, planning is paramount.
ANY of those things?
Surely that’s what most people do? They don’t save for retirement solely to bask in the glow of their undrawn accounts.
It seems to me if a person plans to retire before collecting SS their plan should not include working, trimming expenses or downsizing. But of course, they need a source of income.
No they don’t – they need enough financial resource to draw on to bridge the gap before SS and top up SS to desired lifestyle thereafter.
Otherwise what are those funds going to do – buy a gold plated casket?
Now if they choose to use that resource to buy an annuity income that is but one choice available to them.
And as everyone else says “working” is not one thing. Pay attention to many of the great retirement advisers out there and they’ll say people go to them with what they think is a money question and the answer is often a matter of exploring what retirement really is. Working to your own rules/schedule can be a valid part of that easily and might provide all sorts of benefits beyond the financial like mental stimulation, creativity or social. Why else do people take unpaid voluntary roles?
The strategy to bridge the gap depends on how successfully you have saved and controlled your debts and living expense, as well as what makes you happy. Careful planning and analysis is paramount. I know many retirees whose situation has seriously deteriorated after 20 or so years due to their lack of foresight.
Health issues forced me from a good but strenuous job at age 50. Divorce took half my savings at the same time. Luckily I had no debt and a low cost of living. I began my tax prep business which enabled me to work full time for only 3 months per year and to rebuild my savings. The most important thing was that I enjoyed the work. I sold the practice and began SS at age 70. As a result my benefit is substantial, and I hope that either I or my wife get to enjoy it for many years.
“I know many retirees whose situation has seriously deteriorated after 20 or so years due to their lack of foresight.”
A post giving some examples would be interesting.
Here are 4 examples that I can put names to:
1. Teacher retired in his early 50s, now upper 70s. His wife works out of necessity, and they had difficulty paying a condo assessment for exterior painting. Although the pension has a COLA he still missed out on a dozen or so years of pension credits by retiring at age 52. I overheard his wife complaining/blaming his public pension for their problems.
2. A carpenter retired in his early 50s. Pension has no cola. Now in upper 60s doing side jobs to supplement income.
3. Autoworker took buyout, assuming he would supplement his pension income with part time work. Was shocked to discover the hourly rate of part time jobs available was nothing like the pay he left behind.
4. Another autoworker had asked my opinion. A review of their finances revealed mortgage and credit card debt, as well as auto loans, and non-existent savings cushion. Against my advice he took the buyout. He now drives a truck while his wife passes out food samples at Costco in order to keep their heads above water.
Of course not every early retirement story ends badly. The good ones are usually the people who followed a deliberate path.
Thank you I have heard many similar stories. I have a relative who was a cop. The union encourages them to retire at 20 years of service. She wasn’t even 50. She lives with her mother and house sits and pet sits for money.
Excellent point, Dan, we need to think about what we can do if plan A gets derailed. A sober reminder to keep an eye on debt and improving our skills. I applaud your resilience and congrats on building your tax prep business. Doing work you enjoy for 3 months per year sounds like a pretty nice gig!
All of these are good solutions depending on the individual and their available resources. For my wife and I, we each have a pension that we’ve been drawing since we retired. We also have both done consulting in our fields to supplement our pensions. We are both past our FRA now (we were not when we retired) but are now contemplating timing for collecting SS. We are fortunate that our “GAP” was fairly short and we have/ had sources of income to fill it. As for the other sources listed, the order depends on tax bracket, risk tolerance and liquidity of assets to withdraw from.
Having a pension and consulting to fall back on are very desirable. Thanks for sharing!
If you generate income from work are you actually retired?
Yes. When I ‘work’ for our city’s Parks Department seasonally I consider myself retired.
During my career in sales I would be gone 60-70 stressful hours a week from home. I had to work the days my company told me that I had to.
With the Parks Department at the beginning of the season my boss asks me how often I plan on coming in. I answer him “three days per week… Or whenever I’m here”😁. I get to choose what days I want to go in, if I don’t want to because the weather is too bad or too good I text him and let him know I’m not coming in. If we’d rather go on vacation I let him know I won’t be in that week or weeks. I enjoy driving through the Parks and talking with the people appreciating the Parks.
We don’t need the income it just accumulates in our “Rainy Day” savings account bucket.
To answer your question, YES. I am generating income and I am retired
Sure, let go of the 1950’s definition of retirement. Working part time, pursuing something you truly enjoy, or starting a small business like 3 months of tax work each year is certainly a great way to wind down from a stressful fulltime career and improve your financial health. There is no law that stipulates you can never earn income again after you retire.
No there isn’t, however, if work of some type is required to retire early, then I don’t really think that’s retirement. My last year and a half on the job worked more than 20 hours a week, but I wasn’t retired.
Don’t take this too seriously but are you the retirement police? I mean you are certainly entitled to your opinion of what retirement but why is it so important to prove others wrong in they way they’ve defined their retirements? I really enjoy hearing others share their journeys after retiring from the careers they’ve had for 30 or 40 years. I think even the word retirement means very little. In my “retirement” I don’t actually earn income but pursue several volunteer activities, hike at least a couple days a month, play competitive tennis, read a couple of books a week, spend time at the gym, do a lot of the cooking and housework while my wife continues in her career. I would still enjoy all of these activities even if someone were paying me to do them. This state of being is very different than the work I did for 35 years for a large corporation – while I enjoyed my career, the degree of freedom, interest and passion was no where near what I live now. So yes many people retire from jobs or careers that they performed for decades and yet go on to do things they love and earn some money.
There is no opinion involved. There is both a general and legal definition.
Here is the legal definition. The general Oxford is about the same.
“The act of being in retirement from working and with no plans to return to work.”
So, you are retired or not. You can be semi- retired, but if you are working and earning income you are not retired.
If you don’t earn income you are retired. I spend several hours a day on my blog, but zero income. I too am retired.
You volunteer, but still retired.
Many FIRE folk claim to be retired, they are not, they work and earn in some way.
Does the same rule apply to defining “net worth”?
https://humbledollar.com/forum/is-your-net-worth-worth-it-and-whats-in-it-rdq/
🙂