It’s tempting to assume that your retirement date and your first Social Security check will arrive at the same time. But for many retirees, that’s not how it works out.
According to a MassMutual survey, the average retirement age in 2024 was 62, (1) while most Americans don’t 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.
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If you’re among those planning to retire early, that gap can have an outsized effect on your long-term financial health. Here’s why the timing matters more than you think — and how to make sure your savings can safely carry you across the divide.
The dangerous income gap
Retiring before claiming Social Security creates a vulnerable period — a time when your nest egg has to pull double duty, covering both your expenses and market volatility.
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’ll receive about $25,000 annually in benefits.
With $1 million saved, Susan decides to withdraw 6% per year from her 401(k), assuming the market’s average return of 10% will sustain her. But if she retires into a downturn — say, the S&P 500 drops 10% in each of her first two years and stagnates after — she could end up with just over $525,000 before her first benefit check arrives.
That smaller balance now has to last decades, and her withdrawal rate shoots above 10% — a dangerous level that could drain her savings much faster than expected.
Build your bridge fund before you retire
The best way to protect against this risk is to create a “bridge fund” — a pool of stable assets you can live on until Social Security begins.
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.
That difference could mean the ability to maintain her lifestyle without constantly worrying about the next market swing.
Financial advisers often suggest dialing back exposure to risky assets as you approach retirement anyway. A bridge fund simply formalizes that approach — ensuring you don’t have to sell stocks in a downturn just to pay the bills.
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Consider the tax implications
Many retirees overlook how the timing of their withdrawals can affect taxes. If you’re pulling money from traditional 401(k)s or IRAs before claiming Social Security, you’ll likely be taxed on those withdrawals as ordinary income.
That could push you into a higher tax bracket, especially if you’re 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.
These conversions can be complex, so consult a financial planner to calculate the tax trade-offs before you make the move.
Mind the Medicare gap
There’s another hidden consequence of retiring before 65: health insurance. You’re not yet eligible for Medicare, which means you’ll need to bridge the coverage gap too.
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’t account for that, you could be forced to dip into your nest egg faster than expected.
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.
Retiring before claiming Social Security isn’t necessarily a mistake — 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 “gap years” don’t derail your long-term financial security.
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This article originally appeared on Moneywise.com under the title: Your golden years don’t have to go down the drain — here’s how to keep your savings flowing strong through retirement
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