Social Security has become a relied upon source of retirement income even for the highest earners. As a result, baby boomers often want to know how they can increase their Social Security benefit. So far, we have discussed one of the three ways: Cost-of-Living Adjustments (COLA). In this article we’ll go over how earning more during your working years can increase your benefit.
Many about-to-retire boomers ask how their benefits will be affected if they continue to work or, conversely, if they retire early.
Social Security’s primary insurance amount (PIA) is based on an average of the highest 35 years of earnings. If you don’t have 35 years of earnings, your total earnings will still be divided by 35 years to come up with the average. Working longer will allow you to replace those years of zero earnings with positive earnings and bring up the average. If you already have 35 years of earnings, you can still improve your earnings record if you earn enough to cause an earlier, lower year of earnings to drop off.
A Look at the Numbers
How will these higher earnings affect your Social Security benefit? Let’s use the example of a person born in 1955 who started working in 1977 and earned the Social Security maximum all his life. When he turns 62 in 2017, his PIA is calculated to be approximately $2,800. This is based on earnings from 1982 through 2016.
What if he decides to work an extra year and earns the Social Security maximum of $127,200 in 2017? Now the 1982 indexed earnings of $107,244 will drop off and be replaced by the 2017 earnings of $127,200. His earnings record will now include the years 1983 through 2017 and raise his average indexed monthly earnings, raising his PIA by about $10 dollars.
What if he works another year at maximum earnings? His PIA will go up another few dollars. Incidentally, if his earnings in 2017 had been less than they had been in 1982, it would not cause his PIA to go down. Once the PIA has been calculated at age 62, higher earnings may cause it to go up, but low earnings will not cause it to go down.
So you can feel free to shift to part-time work without jeopardizing your Social Security benefit, understanding that if you are under full retirement age (FRA), $1 in benefits will be withheld for every $2 you earn over $16,920 in 2017.
Again, we’re talking small amounts, but they grow larger when you multiply them out and apply COLAs and delayed retirement credits.
There may be more ways to increase your Social Security income if you also qualify for spousal benefits, divorced- spouse benefits, or survivor benefits. It’s also important to recognize that, while we’ve outlined some general rules of thumb in these articles, there’s no guarantee the advice here works well within the context of your overall financial plan and greater retirement goals. For customized help, visit a financial advisor who has the calculation tools necessary to analyze your individual Social Security claiming situation.
Mark Singer, CFPⓇ, President of Safe Harbor Retirement Planning, has been recognized for his vision and creativity within the world of financial planning. He has been in the industry for over three decades, is the author of three books, and is a frequent speaker. Request a free copy of the 2019 Social Security Quick Reference Guide, which gives you key Social Security numbers to help you in planning, here. Get in touch with Mark at 781.599.2660, [email protected], and 55retire.com. This content was developed in conjunction with Elaine Floyd, CFP®.