<\/p>\n
Envato\/fentonroma<\/p>\n
It\u2019s tempting to assume that your retirement date and your first Social Security check will arrive at the same time. But for many retirees, that\u2019s not how it works out.<\/p>\n
According to a MassMutual survey, the average retirement age in 2024 was 62, (1) while most Americans don\u2019t start claiming Social Security until age 65, according to AARP. (2) That leaves a gap of roughly three years where retirees have to fund their lifestyle entirely from their own savings.<\/p>\n
Must Read<\/p>\n
If you\u2019re among those planning to retire early, that gap can have an outsized effect on your long-term financial health. Here\u2019s why the timing matters more than you think \u2014 and how to make sure your savings can safely carry you across the divide.<\/p>\n
The dangerous income gap<\/p>\n
Retiring before claiming Social Security creates a vulnerable period \u2014 a time when your nest egg has to pull double duty, covering both your expenses and market volatility.<\/p>\n
Take Susan, for example. She plans to retire at 60, needs $60,000 a year to live comfortably, and wants to delay claiming Social Security until 65, when she\u2019ll receive about $25,000 annually in benefits.<\/p>\n
With $1 million saved, Susan decides to withdraw 6% per year from her 401(k), assuming the market\u2019s average return of 10% will sustain her. But if she retires into a downturn \u2014 say, the S&P 500 drops 10% in each of her first two years and stagnates after \u2014 she could end up with just over $525,000 before her first benefit check arrives.<\/p>\n
That smaller balance now has to last decades, and her withdrawal rate shoots above 10% \u2014 a dangerous level that could drain her savings much faster than expected.<\/p>\n
Build your bridge fund before you retire<\/p>\n
The best way to protect against this risk is to create a \u201cbridge fund\u201d \u2014 a pool of stable assets you can live on until Social Security begins.<\/p>\n
For instance, if Susan had moved $300,000 of her portfolio into bonds or Treasury funds earning around 5%, her portfolio might have ended that five-year period closer to $600,000, even with poor stock market performance.<\/p>\n
That difference could mean the ability to maintain her lifestyle without constantly worrying about the next market swing.<\/p>\n
Financial advisers often suggest dialing back exposure to risky assets as you approach retirement anyway. A bridge fund simply formalizes that approach \u2014 ensuring you don\u2019t have to sell stocks in a downturn just to pay the bills.<\/p>\n
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement<\/a><\/p>\n Consider the tax implications<\/p>\n Many retirees overlook how the timing of their withdrawals can affect taxes. If you\u2019re pulling money from traditional 401(k)s or IRAs before claiming Social Security, you\u2019ll likely be taxed on those withdrawals as ordinary income.<\/p>\n That could push you into a higher tax bracket, especially if you\u2019re also earning side income or taking required minimum distributions (RMDs) later on. One strategy to consider: Roth conversions during your gap years. By converting portions of your traditional retirement savings to a Roth account before you start claiming benefits, you can take advantage of potentially lower tax rates and create more flexibility later.<\/p>\n These conversions can be complex, so consult a financial planner to calculate the tax trade-offs before you make the move.<\/p>\n Mind the Medicare gap<\/p>\n There\u2019s another hidden consequence of retiring before 65: health insurance. You\u2019re not yet eligible for Medicare, which means you\u2019ll need to bridge the coverage gap too.<\/p>\n Depending on your income, you may qualify for subsidies through the Affordable Care Act marketplace, but premiums can still run several hundred dollars a month. If your savings plan doesn\u2019t account for that, you could be forced to dip into your nest egg faster than expected.<\/p>\n If you have a spouse still working, joining their employer plan can be a smart alternative. Otherwise, factoring in several years of private coverage costs is essential before you take the leap.<\/p>\n Retiring before claiming Social Security isn\u2019t necessarily a mistake \u2014 but doing so without a plan can damage your retirement savings. By building a bridge fund, planning around taxes and preparing for health insurance costs, you can ensure those \u201cgap years\u201d don\u2019t derail your long-term financial security.<\/p>\n What To Read NextArticle sources<\/p>\n We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines<\/a>.<\/p>\n MassMutual (1<\/a>); AARP (2<\/a>)<\/p>\n This article originally appeared on Moneywise.com<\/a> under the title: Your golden years don\u2019t have to go down the drain \u2014 here\u2019s how to keep your savings flowing strong through retirement<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Envato\/fentonroma It\u2019s tempting to assume that your retirement date and your first Social Security check will arrive at…\n","protected":false},"author":2,"featured_media":257714,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[64,63,1348,99,186,2289,135041,21831,184,185,151875],"class_list":{"0":"post-257713","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-au","9":"tag-australia","10":"tag-breaking-news","11":"tag-business","12":"tag-finance","13":"tag-local-news","14":"tag-moneywise","15":"tag-newsbreak","16":"tag-personal-finance","17":"tag-personalfinance","18":"tag-your-golden-years-dont-have-to-go-down-the-drain-heres-how-to-keep-your-savings-flowing-strong-through-retirement"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/257713","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=257713"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/257713\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/257714"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=257713"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=257713"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=257713"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}