Bridging the Retirement Gap: What to Know

Retiring before you’re eligible for government benefits or your full retirement age (FRA) can bring about a time of financial uncertainty, often called the bridge period. Covering your living expenses can become challenging without a steady paycheck and access to Social Security or Medicare. To fill these gaps, many must reach into the retirement savings they’ve accumulated throughout their careers.

In this article, we’ll explain how the retirement bridge period works and break down strategies people commonly use to cover their expenses, such as the Rule of 55 and Rule (72)t. You’ll also learn how a financial advisor can help you navigate early retirement and make crucial decisions, such as when to take Social Security.

Understanding the Retirement Bridge Period

Early retirement from your long-standing career, whether planned or unexpected, often means you no longer earn a reliable income from a job or government benefits, including Social Security and Medicare. This requires you to pay for your living expenses and insurance via savings or other income sources, such as rental properties or a post-retirement job.

More specifically, the bridge period begins from any time you retire until you’re able to:

• Start receiving Social Security and Medicare benefits (including deferring to FRA).
• Access tax-advantaged savings accounts, such as your Roth IRA, 401(k), or 403(b). This is typically at age 59.5 but can begin as early as 55 if you have a 401(k) and leave your job.

During the retirement bridge period, the primary issue is not having enough income to sustain your desired lifestyle or unexpected expenses. Tapping into tax-advantaged savings accounts too early can also cause you to incur early withdrawal penalties, which amount to 10%. Additionally, some accounts, such as traditional 401(k)s or 403(b)s, increase your tax burden as you take distributions.

Another crucial concern is how you’ll pay for healthcare. Once a retiree turns 65, they’ll be eligible for healthcare; however, retiring early puts the pressure on you to ensure you have health insurance. Typically, you must pay out of pocket for a policy or be added to your spouse’s policy if they have one.

Common Retirement Bridge Strategies

The primary challenge of the bridge period is the inability to receive monthly Social Security payments or take distributions from your retirement accounts. However, there are several strategies you can use to fill income gaps and ensure you keep your finances afloat:

Rule of 55

Typically, the age you must be to withdraw funds from 401(k) or 403(b) is 59.5 years old. The Rule of 55, an Internal Revenue Service (IRS) exception for defined contribution plans, allows you to take distributions penalty-free if you leave your workplace at 55 or older. This applies no matter how you exit your job—whether you retire, resign, or are let go.

Rule 72(t)

Similarly, the IRS’ Rule 72(t) grants the ability to take penalty-free distributions from IRAs and employer-sponsored retirement plans under certain circumstances. This includes leaving work, first-time home purchases, or the death or disability of an account holder.

However, the caveat to Rule 72(t) is that you must take at least five substantially equal periodic payments (SEPPs), which can also depend on your life expectancy. We recommend speaking with a financial advisor before taking advantage of this exception, especially since your circumstances and payments may be unique.

Working Part-Time

Another option to supplement your retirement income during the bridge period is to work a part-time job. “Part-time work provides a regular income and helps create a sense of purpose and routine, which is good for mental health,” explains Austin Rulfs, a Finance and Property Specialist at Zanda Wealth.

Rulfs adds that he has a client “who was extremely happy doing consulting in their area of expertise after retirement.” By working a job they enjoyed, they could stay “active and engaged while earning a steady income to support their lifestyle until they could start using their Social Security benefits,” he says.

Withdrawing from Taxable Investment Accounts

If you have funds within taxable investment accounts, this can also help bolster your retirement income until you’re able to access other sources. A key benefit, Rulfs points out, is that it “allows for better handling of taxes by leveraging the lower tax rates in the early years of retirement.” Additionally, it helps you avoid taking hefty penalties for withdrawing from your tax-advantaged accounts too early.

Alternative Income Sources

Additional sources, or those not from a job, can help supplement your monthly income. For instance, rental property income, stock dividends, or a side hustle can help provide a boost.

Deciding When to Take Social Security

A vital decision once you retire (or plan to) is when you decide to start your Social Security payments. Taking it as soon as you’re eligible, while an income boost, can reduce your overall benefits while waiting until FRA allows you to earn the highest amount possible. While it may seem best to simply wait until the FRA, it may not be feasible to do so if you don’t have other income sources available.

Your preference here heavily depends on your circumstances and the value of taking benefits early vs. later on. To help you consider the choice, here are five questions you can ask yourself and discuss with a financial advisor:

1. Do I have enough savings or income to delay payments?
2. What is the opportunity cost if I choose to take benefits now vs. at FRA?
3. Will taking Social Security payments now push me into a higher tax bracket due to other income sources?
4. What is my estimated lifespan based on health and family history?
5. Am I the higher- or lower-earning spouse in my marriage?

The questions above can help you understand the most crucial factors that may influence your decision. For instance, if you’re a lower-earning spouse, you may be able to take your benefits now while you wait for your partner to become eligible. Ultimately, however, when you receive your Social Security benefits is an important decision we recommend discussing with an experienced financial professional.

Christine Mueller Coley, CFP^®, CDFA^®, Wealth Advisor at Steelpeak Wealth Management, explains that she would “typically recommend waiting to draw Social Security until Full Retirement Age or up to age 70 to maximize your benefits” if you’re in good health. She adds that “while no one knows how long they will live, we can run a breakeven analysis to determine how to get the most out of your Social Security benefits.”

How a Financial Advisor Can Help

The retirement bridge period presents significant challenges that can be difficult to overcome once you retire. For this reason, it’s crucial to have a financial advisor by your side to help you make the right decisions and understand how to manage your circumstances.

A financial professional will be able to sit down with you to make important decisions, such as knowing when to take Social Security or how to tap into your tax-advantaged retirement accounts efficiently while avoiding penalties. IRS exceptions like the Rule of 55 and 72(t) can be complex and hard to follow without the assistance of an expert.

An advisor can help determine how much to keep in an emergency fund so that, even during retirement, you’re ready for surprises. “A good planner would already build this contingency into your plan – we always plan for market fluctuations and emergency savings,” says Coley. It’s crucial to “consider emergencies, inflation and expenses that aren’t on a fixed basis like a car repair, home repair, medical expense, etc.,” she adds.

We recommend working with a high-quality financial advisor proficient in comprehensive planning, such as a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC). It’s also important that the professional you work with adheres to a fiduciary duty and aligns with your goals. After filling out a brief quiz regarding your current situation and goals, this free matching tool will connect you with an advisor that suits your needs.