When most people think about Social Security, they picture a monthly benefit check arriving in retirement. But Social Security can play a much larger role in your overall financial plan, especially when it comes to coordinating it with your investments.
In this blog, we’ll explore how to make Social Security an active part of your asset allocation, helping you create a more resilient and tax-efficient retirement plan.
Social Security as a Foundation of Retirement Income
Rather than treating Social Security as simply supplemental income, it can serve as a stable foundation in retirement. With benefits backed by the U.S. government and adjusted for inflation, Social Security provides dependable payments to help balance other income sources.
Plan for Delayed Benefits with a Bridge Strategy
If you delay claiming benefits until age 70, your monthly payments will be higher, but you’ll need to fund your lifestyle in the meantime. This means keeping enough conservative assets available in your early retirement years to cover expenses while waiting for that larger benefit. Many retirees use a “bridge strategy” for this, allocating cash or short-term bonds to cover living costs so they don’t have to sell equities during a downturn.
Use Social Security to Reduce Sequence-of-Returns Risk
If you begin retirement in the middle of a market downturn, Social Security can serve as a stabilizing force. This steady income stream means you don’t need to draw as heavily from your portfolio at the worst possible time. Some retirees incorporate Social Security into a ‘guardrails withdrawal strategy’ to help manage withdrawals and reduce the risk of depleting assets too quickly.
Coordinate for Tax Efficiency
Up to 85% of Social Security benefits may be taxable, depending on your income level. The order in which you withdraw from IRAs, Roth accounts, or taxable brokerage accounts can determine how much of your benefit is subject to tax. By coordinating withdrawals carefully, you may be able to manage income thresholds and keep more of your benefit.
Align with a Bucket Strategy
Social Security can be a reliable source for covering your ‘essential’ spending bucket (housing, utilities, food, insurance). That leaves more flexibility for your lifestyle bucket (travel, hobbies, entertainment) and your legacy or growth bucket (long-term investments or wealth transfer goals). Thinking of Social Security this way helps ensure your most important needs are funded first.
Final Thoughts
Social Security can play a significant role in many retirement strategies. The key is asking yourself: Is my Social Security working alongside my investments, or is it just sitting on the sidelines?
If you’re unsure, a financial professional can help tailor a plan to your unique circumstances. That’s where we come in.
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* This material is not intended to provide, and should not be relied on for, tax advice. Please consult a qualified tax professional regarding your individual circumstances.
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