Many older Americans talk about their Social Security retirement benefits. What they often don’t address, however, is how they earned them. Most people know that your benefit payments are tied to your lifetime earnings and how long you waited to take them, but they don’t know anything more specific about how they work.
Benefit payments are calculated using the 35 highest earning years of income during a lifetime. If the results from these years would result in a lackluster benefit payment, it may make sense to keep working and earning past retirement age to shore up the numbers and get the payout more aligned with your retirement goals. Here are both sides of this popular strategy. (For related reading, see: 10 Commonly Asked Questions About Social Security.)
Why You Should Consider Working While Collecting Benefits
- It can increase benefits for those without a full 35 years of earnings. While the average breadwinning American will no doubt have many more than 35 years of income to work with, some demographics are more likely to fall short of 35 working years. Most notably, this affects stay-at-home moms who may have chosen to raise children full time. While raising a child is indisputably work, because it is not salaried, those years have a negative impact on Social Security calculations. Even with a part-time job, the earnings for a stay-at-home mom's top 35 years are going to be small in comparison to the full-time breadwinner. Working later in life after the kids are grown can increase benefit payments significantly, even if many of those years were earned at retirement age.
- You maintain a stable income while you wait to reach full retirement age. Want the full benefits that come at age 70? Why not work while getting there? Even if you’ve amassed a sizeable and reliable nest egg, it’s nice to not have to dip into it prior to your full retirement age. A 2013 Gallup poll revealed that 30% of retirement-aged workers do so because they want to, not because they need to. The money they earn in those years can further fund their retirement dreams, even if they don’t need the cash immediately.
- It allows lower-earning years to drop off. Even if you have more than 35 years of work history, your younger years may not have had you earning at your full potential. Most everyone starts out making lower wages than when they retire. But even with earnings adjusted for inflation, a meager start can negatively affect the size of your Social Security payments. If you ever worked just part-time or were launching a business with weak first-year earnings, meatier wages earned at the end of your career may put you in a better overall benefits position. As stated, the calculation is made using only the 35 years during which you earned the most. Replacing a year or two with higher earnings will push up your average. (For more from this author, see: Applying for Social Security Before Retirement Age.)
Other Factors to Consider
If you can work, there may not be too many disadvantages, economically speaking, to continuing into your retirement years. Once you’ve earned enough to maximize your benefits, however, it just may not be something that interests you. Retirement, for many, can’t come soon enough - even with the promises or higher benefit payments.
Some have found working simply to increase benefits is cumbersome and possibly even to the detriment of their quality of life. Boosting your benefits may lose its appeal if you are missing out on time with friends and family, doing work you dislike or dealing with negative effects on your health. Depending on your work history and retirement-age employment, the benefits may be too small to outweigh the detriments. A 1%-2% increase in benefit payments is a dinner out for many - not nearly enough to warrant an extra year or two at a job you really don’t enjoy.
As we age, we seem to have less and less of one precious asset: time. The choice to work may keep you from caring for an ill spouse, spending time with your children or grandchildren, or achieving a lifelong goal while your health still permits. Only you can assess if the added benefit of a few more years working is worth the things you may give up to do so.
In the end, the decision to continue working is a personal one. Most choose to do so because they love their job or they need the income to live on in addition to their benefit payments. Still others relish the thought of squirreling away more into their retirement store while they can, ensuring that the images of white beaches and long golf session are a reality. A potential increase in Social Security payments is not usually motivation enough to keep working, but it’s a nice consequence for those who will be doing it anyway. (For more from this author, see: Often Missed Social Security Claiming Options.)
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This information is not intended to be legal or tax advice. The author can provide information, but not advice related to social security benefits. Clients should seek guidance from the Social Security Administration regarding their particular situation. Social Security benefit payout rates can and will change at the sole discretion of the Social Security Administration. For more information, please consult a local Social Security Administration office, or visit www.ssa.gov.
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