Executive Summary
The conventional view of delaying Social Security is that doing so is an opportunity to earn delayed retirement credits, an 8%/year increase in benefits that can be highly appealing in today’s low-yield environment.
However, the reality is that delaying Social Security benefits doesn't just increase benefits by earning delayed retirement credits. Additional years of working while collecting Social Security benefits can also increase the worker’s Average Indexed Monthly Earnings used to calculate those Social Security benefits in the first place, just as ending work early can reduce AIME below what is projected as benefits on the Social Security statement.
And depending on how much additional income will be earned – and how low his/her historical earnings really are – the reality is that continuing to work while getting Social Security benefits can produce a material increase in future payments for some workers, simply because of how benefits are recalculated. In other words, for those past full retirement age (and no longer subject to the Earnings Test), it’s possible to be receiving Social Security benefits while working and have those years added to the Social Security work history to generate higher future benefits as well!
In the end, working while on Social Security won’t always produce a significant increase in Social Security benefits. For those whose prior working years produced more income – at least on an inflation-adjusted basis – it’s possible that continuing to work will generate no additional benefits at all. Nonetheless, for those who haven’t fully capped out Social Security benefits based on 35 years of maximal earnings already, it is possible to be working and getting Social Security benefits at the same time, and have that work increase the benefits (at least after reaching full retirement age). And the potential for a benefits increase can be material in some cases, and thus should definitely be considered in the timing and impact of when to stop working!
How Social Security Benefits Are Calculated
Similar to a pension, Social Security provides a stream of retirement income that continues as long as the recipient is alive (and adjusts for inflation along the way). And also like a pension, Social Security calculates its benefits by applying an “income replacement” formula, based on the earnings of the individual during his/her working years.
The difference, however, is that while a pension might simply be calculated based on an individual’s last-3 or last-5 years of earnings, Social Security is actually paid out based on an average of 35 years of lifetime earnings. And it doesn’t have to be a consecutive 35 years or the last 35 years; Social Security uses whatever the highest 35 years were over the worker’s entire career.
Calculating Average Indexed Monthly Earnings (AIME)
The caveat to calculating an average of a worker’s highest 35 years of historical earnings is that in the distant past, earnings were typically lower – not just because the worker might have been earlier in his/her career, but simply because inflation lifts average wages over time (which means older more distant wages were lower in part simply because the inflation hadn’t happened yet!). For instance, the chart below is an example of one worker's hypothetical historical earnings, with a high point in the early years (before a career change) but in general a slow upward trend to earnings over time.
Accordingly, when Social Security determines the 35-year average of earnings, it first inflation-adjusts those earnings into current dollars using the National Average Wage Index. Technically, this is done by inflation-indexing all historical earnings into a base year that was 2 years before the individual turned 62 and first became eligible for benefits. Thus, a 62-year-old in 2016 will have historical earnings inflation-adjusted to the 2014 wage index; in general, Social Security benefits are indexed to wage levels 2 years before becoming eligible at age 62, which means indexed to the individual’s age 60. This ensures that benefits based on historical average wage calculation isn’t indirectly reduced simply due to the fact that wage inflation hadn’t yet occurred in the past.
Once inflation-adjusted earnings have been calculated throughout all the working years, it’s possible to determine which were the highest 35 years of earnings that will be included in the Social Security benefits calculation (while the remaining "lower income" years are thrown out, as shown below).
In turn, once the highest 35 (inflation-adjusted) years of earnings have been determined, an average of those years can be taken. In our example above, this would equate to about $72,000/year.
Notably, since Social Security benefits are ultimately paid on a monthly basis, they are also calculated on a monthly basis. Accordingly, the individual's Average Indexed Monthly Earnings (or AIME for short) would be $72,000/year divided by 12 months/year = $6,000/month. Alternatively, this simply means the AIME is calculated by adding up the top 35 years of Social Security work history, and dividing by 35 years x 12 months/year = 420 months to determine the AIME, which is then used to calculate the actual Social Security benefit.
Applying Social Security Bend Points To Convert AIME To The Primary Insurance Amount (PIA)
While the AIME determines the amount of average lifetime earnings that will be used to calculate a Social Security benefit, the actual benefit calculation still requires applying the income replacement factors.
With pensions, it was/is typical to use a single replacement percentage tied to years of work. For instance, a worker’s pension income might be 2% of final wages for each year worked, which means someone with 35 years of working history will receive a 35 years x 2%/year = 70% replacement rate. With Social Security, however, there are 3 replacement rate tiers, and they’re based not on the number of years worked, but on the worker’s average earnings in the first place (as calculated by AIME).
Specifically, Social Security is calculated by replacing 90% of the first $856/month (in 2016) of AIME, plus 32% of the next $4,301/month of AIME (up to $5,157 of total AIME), plus 15% of any remaining income above $5,157/month of AIME. The last 15% tier applies up to the maximum amount of earnings that can ever be considered for Social Security, which in 2016 is $9,875/month (equal to the maximum Social Security wage base of $118,500/year – thus the only earnings included in the Social Security benefits formula are the earnings subject to Social Security taxation).
The benefit calculated under this income replacement formula is called the Primary Insurance Amount (or “PIA” for short), and represents the benefit the retiree would get at full retirement age. (Starting benefits early entails a reduction, and postponing them later can still earn an appealing delayed retirement credit.) Because the Social Security income replacement formula has multiple tiers, the net result is that as income (AIME) increases, the actual Social Security benefit PIA) increases more slowly... which in turn means Social Security effectively replaces a higher percentage of income for lower-income workers, and less for higher-income workers.
Example 1. If the lifetime inflation-adjusted average earnings of $72,000/year (or $6,000/month) charts shown earlier belonged to Daphne, her benefits would be 90% x $856/month plus 32% x $4,301/month, plus 15% of the remaining $843/month, for a Primary Insurance Amount of $2,210.47/month. If Daphne begins her benefits early (as early as 62) the $2,210.47/month will be reduced, and if she delays (as late as age 70) they will be increased. This Social Security benefit replaces 36.8% of Daphne’s career earnings.
Example 2. On the other hand, assume Jeremy has a lifetime inflation-adjusted income (AIME) of only $24,000/year (or $2,000/month). Accordingly, Jeremy’s benefits would be 90% x $856/month plus 32% x the remaining $1,144/month, for a PIA of $1,136.48. Again if Jeremy starts early the benefits will be reduced, and if he delays they will increase. Nonetheless, Jeremy’s overall benefits are 56.8% of his lifetime income – a higher replacement rate at lower income levels, thanks to the graduated tiers of the Social Security income replacement formula.
For someone who earns the maximum income eligible for Social Security throughout their working career, the maximum Social Security benefit is $2,639/month in 2016. (Notably, this is slightly smaller than just applying the Social Security income replacement formulas to a maximum income of $9,875/month, due to the fact that the inflation indexing effectively only applies up to age 60, and from that point forward benefits are simply calculated based on actual earnings increases for inflation.)
Measuring The Impact Of Additional Working Years On Social Security Benefits Calculation
So given these dynamics for calculating Social Security benefits, what are the consequences of someone continuing to work and adding in more years of income – either leading up to becoming eligible for retirement benefits, or even in their 60s and beyond as they are already eligible for benefits?
As noted earlier, for Social Security the income replacement tiers are always the same percentages with the same thresholds, regardless of how long someone worked (and unlike a pension where the replacement rate is often higher as the number of years-worked accrues). Thus, regardless of the number of years worked, the formula to convert the AIME into PIA will always be the same, even with additional working years.
However, what does change with additional working years is the calculation of the AIME itself. Since the AIME is calculated based on the highest 35 years of earnings – and they can even be non-consecutive years – then additional working years that add to the highest-35, and knock off a prior “lower income” year, can increase the AIME calculation, and therefore the amount of Social Security benefits.
Example 3. Continuing the earlier example #1 with Daphne, assume that Daphne gets a high-income consulting job late in her career, which pays her enough to reach the Social Security wage base limit. Earning the maximum $118,500 wage base for this year will replace her prior lowest inflation-adjusted income year of $55,500. The additional $63,000 of higher earnings will in turn increase the 420-month AIME by $63,000 / 420 = $150, and given the 15% replacement tier will in turn increase Daphne’s PIA by $22.50. The end result: by adding in a year of $118,500 income to replace the prior $0 year, Daphne’s benefit increases by $22.50/month, a mere 1.02% increase in Social Security retirement benefits!
As this example highlights, the key driver of whether it’s worthwhile to keep working for higher Social Security benefits depends on how much the individual expects to earn in the coming year, and what his/her lowest inflation-adjusted income year was in the past. As it is the difference between the two that drives the outcome. In addition, what PIA income replacement tier the worker is in also has a dramatic impact on the value of additional years of earnings, as revealed in the example below.
Example 4. Continuing the earlier example #2, Jeremy wants to understand the impact of adding in a year of high earnings to his $24,000/year historical earnings. Following the approach above, Jeremy first determines which Social Security bend point would apply (with $24,000/year of historical earnings, or an AIME of $2,000/month, he’s eligible for the 32% rate). Next, Jeremy finds which of his high-35-years of inflation-adjusted earnings is the lowest (we’ll assume it’s $24,000 and that he had flat inflation-adjusted income throughout life). If Jeremy can earn the Social Security wage base maximum of $118,500, it will be an increase in earnings of $94,500 over his lowest income year, which means his benefits will be increased by $94,500 / 420 x 32% = $72/month! Given that his PIA was originally $1,136.48/month, this is a whopping 6.3% increase in lifetime benefits by adding in one high-income year!
How To Calculate The Marginal Social Security Benefit Increase For Additional Years Of Income
Of course, the caveat is that determining whether an upcoming year’s worth of earnings may be higher than historical inflation-adjusted earnings requires first determining what those historical earnings were on an inflation-adjusted basis. This can be estimated by first obtaining the individual’s Social Security work history, which can be found by logging into the individual’s “My Social Security” online account, or drawn directly from his/her Social Security statement. Once those historical earnings are found, they can be adjusted using the National Wage Index adjustment factors (which can be requested directly from the Social Security Administration website), to determine what the inflation-adjusted historical earnings amounts really were.
Obtaining the list of year-by-year historical earnings from the Social Security work history record is ultimately necessary for two reasons. First, it’s necessary to determine which of the three “bend points” – the Social Security income replacement rates – will apply, as there’s a big difference in benefit between the 90%, 32%, and 15% levels! Second, having historical inflation-adjusted earnings makes it possible to compare the upcoming year’s earnings to the lowest historical inflation-adjusted year, to determine the income difference and prospective increase in AIME.
In fact, once the rest has been determined, the Social Security benefit increase for working another year is simply the difference in earnings between the new year and the lowest historical year, divided by 420 (the number of months in the 35-year average for AIME), and multiplied by the 90%, 32%, or 15% replacement rate!
When Is It Worthwhile To Continue Working While On Social Security For Higher Benefits?
In the end, whether or how beneficial it is to continue to work while on Social Security in order to generate higher Social Security benefits in the future depends heavily on two factors: what income replacement tier (90%, 32%, or 15%) the Social Security recipient will be in (based on average historical earnings from the Social Security work history); and what the existing earnings history already was (because the increase in benefits is based only on the difference between the new year of earnings and the prior lowest year that is removed from the equation). Similar to the consequences of retiring early (and not continuing to work up to full retirement age in the first place), the consequences vary depending on where the individual is in the AIME calculation.
How Will Work Affect Your Benefits?
The lower the historical inflation-adjusted income, the more significant the value of continuing to work, both because the income replacement tier may be more favorable, and because there will typically be lower income years to replace. In the logical extreme, where a worker doesn’t even have 35 years of historical earnings, additional working years will replace a $0 year in the AIME equation with the new year’s worth of earnings, giving the full benefit of the earnings at the current income replacement tier to be added into Social Security benefits! (And of course, if the worker didn’t even have the requisite 40 quarters of eligible work to get a Social Security benefit, continued work can be the difference between getting some benefit or nothing at all!)
On the other hand, if the historical earnings are already high enough that adding another income year doesn’t replace any of the prior years, the impact of having another working year could be precisely $0 on future Social Security benefits! Or if historical AIME was already high, adding in a higher income year (e.g., $100,000/year of earnings) could have a very modest effect if the prior lowest year was already $80,000 (which means the income increase is only $20,000, and once dividing by 420 and multiplying by the lowest 15% replacement tier, is a mere $7/month benefits increase!).
It’s also worth noting that since continuing to work increases the worker’s overall PIA, it increases not only his/her own benefit, but any other benefits paid based on that earnings record – which means continued work can increase the retirement benefit, and a spousal benefit, dependent benefit, or a future survivor benefit as well.
Don't Forget The Social Security Earnings Test
The only important caveat to the strategy of receiving Social Security benefits and working at the same time is the Social Security Earnings Test - where ongoing earned income (i.e., wages from a job or self-employment income) can partially or fully reduce retirement benefits if they are taken early. So you cannot retire at 62 and still work, or earned income above the Earnings Test threshold will reduce the retirement benefits. The strategy of working while getting Social Security benefits is only viable after reaching full retirement age (currently age 66). On the other hand, beyond that point, it really is possible for each subsequent year of work in someone's late 60s or even 70s and beyond, to be receiving Social Security benefits while working and have those benefits recalculated for the future based on another year of work (if the additional work year really does increase AIME)!
The bottom line, though, is simply to recognize that it's possible to be receiving Social Security benefits and work, and in fact continuing to work can continue to increase future Social Security benefits. The actual impact, though, is heavily dependent on just how high the historical inflation-adjusted earnings have been – and whether there’s a low year amongst the top-35 prior years that could be “upgraded” for a higher benefit. In addition, the relative benefit of continuing to work is heavily dependent on which income replacement rate the worker is eligible for – as at the upper end of the income scale the additional benefits are modest, but at the lower end, the formulas can provide a tremendous boost for continuing to work just a few more years!
So what do you think? Have you ever counseled a prospective retiree to keep working after 66 not just to delay Social Security benefits, but to increase their earnings in order to be eligible for a higher calculated benefit? Would you consider the strategy in the future? Please share your thoughts in the comments below!
Great article Michael. You really simplified the math which makes the message so much easier to communicate. I appreciate the great work you do distilling complicated concepts into simple charts and graphs. Thanks.
A few years ago I co-authored a paper looking at some of these issues. In most cases people received practically no additional benefits in exchange for working longer and paying additional taxes. For men, the 35-year earnings averaging period was the main issue; in the benefit formula, past earnings are indexed for wage growth, so earnings in an additional year of work need to be pretty high to have any real effect on benefits. For women the issue is spousal benefits. Many women still receive a benefit based on their husband’s earnings. If so, working an additional year usually won’t have any effect on benefits at all. To improve incentives, I’ve argued for lowering the payroll tax rate for near-retirees,
https://www.ssa.gov/policy/docs/issuepapers/ip2009-02.html
Andrew,
Thanks for sharing! I’m interested in your paper, though the link you included is coming up as broken for me? Can you send this to me directly?
Definitely agreed that in practice people perhaps “misjudge” how not-higher their later years’ income actually is once you inflation-index prior years, and especially with further data suggesting income for most actually flattens or even declines on a real basis after age 50 (see https://www.kitces.com/blog/big-raises-and-lifestyle-creep-why-its-crucial-to-establish-good-spending-habits-early/). Though ultimately I find the biggest driver is simply which income replacement tier they’re in – the impact for those in the top bend point is modest, but in the bottom bend point can still be quite substantive.
I’m probably going to do a whole separate follow-up to this on the interplay with spousal benefits though. You’re right I gave this basically no treatment here, and in practice for married couples it significantly mitigates the value of additional work. If we include mortality assumptions about the likelihood of a near-term survivor benefit, that likely further reduces the benefit of additional work years by a lower-income spouse…
– Michael
Hi Michael,
I think this link will work: https://www.ssa.gov/policy/docs/issuepapers/ip2009-02.html
One of the keys is that past earnings aren’t just inflation indexed, but wage indexed. This raises your early career earnings by a LOT in terms of the benefit formula, making it harder for current earnings to edge them out and lead to a benefit increase.
The replacement factors obviously lower returns to work as your lifetime earnings rise; early on you’re essentially replacing 90%, then 32% and finally only 15%. But going from 15% to zero is mostly a function of maxing out your 35 years or (if you’re a woman) being eligible for spousal benefits. Spousal benefits are a good deal for women overall, but at the margin they often make the return to additional work zero. But that really depends on the relative earnings between spouses. For higher-income households, women are more likely to be eligible for a benefit based on their own earnings, so marginal returns for those women are probably higher.
Thanks for covering this issue!
Best,
Andrew
Very informative! Thanks for posting…filled in a lot of gaps in my understanding.
Have you considered the additional FICA contribution for the extra years worked beyond FRA. If you are earning up to the income cap-this year $118,000 then as an employee you contribute $7,182 and if self employed double that figure. That extra contribution to SS needs to be factored into the new breakeven point based on not earning any FICA eligible income. This FICA contribution is a cost is it not? This needs to be balanced against the increased benefit. Thank you for your unique and continued contribution to raise the standards of what we do.
Ira,
Stay tuned. We’ll be looking at this from a “cost” and ROI perspective (benefits gained for FICA taxes paid) in a future post. 🙂
– Michael
As always thank you so much. I will look forward to your analysis.
However, there are a few more factors that make that figure, however large in someone’s mind a moot point. Here is what I mean. Burying some of the SS received into a 401k and then into a fixed % account makes a huge savings. For me over 30%/year non compounded! Also, big item too, I get the benefit of Medicare costs but employer contributed medical coverage…not a big amount but more than IF I were entirely retired, THEN, factor in I get a pension from the employer based on years of service…another boost. The $7k figure may be large but not according to other nice factors IMO.
LOL!! If you consider the extra $7,182 a cost to be factored in to a decision whether to continue working or to retire then you must consider the additional $118,000 earned while working as a benefit. Considered in this light, you reach your break-even point before you even begin to collect!!
In choosing a SS calculator that allows for iterations, what companies produce a software package that describes a recipients choices in similar detail to your excellent tome?
Awesome article! I am a property casualty insurance agent that found your material while researching my own situation and the information you provide is the very best I have ever found. Thanks for making it so understandable.
Michael,
Excellent article!
I’ve got a question in terms of calculating the AIME for someone who has less than 35 years of earnings history, but has years of earnings significantly above the SS wage base ($118,500 at today’s level).
For simplicity, assume someone worked 20 years at increasing earnings each year. Assume their first several years were at earnings well below the SS wage base/cap and the last many years at earnings well above the SS wage base. In total over 20 years, this person earned a total of $6,000,000 or an average of $300,000 per year (and let’s leave out inflation/wage adjustments). Whether I divide that total by 240 (number of months actually worked) or 420 (number of months assuming 35 years worked) I get an AIME of $25,000 or $14,286. Although I’m not sure which denominator is correct (can you enlighten me on that too), in either case, the AIME is well above the $9,875 cap. So I assume this person would be eligible for the maximum SS benefit (assuming he/she took benefits at full retirement age).
Or does the math actually only include earnings in the AIME that were actually subject to SS tax? In other words, the lifetime earnings for the purposes of calculating the AIME for someone who worked only 20 years could not be greater than 20 X $118,500 (I know the wage base would have been lower in earlier years, but I’m trying to keep the math and this example as simple as possible) or $2,370 per month? And in my example, it would be less than $2,370 because this person worked several years with earnings below the SS wage base/cap?
This is a long way of saying, can one reach the maximum AIME while working significantly fewer than 35 years if they have a number of earnings years way above the SS wage base/cap?
Mike
I answered my own question with a little research this morning. Denominator is 420 and earnings above the SS wage base cap are excluded 🙁
I know it’s insanely obvious, but working another year increases income for that year. Some people are so focused on the benefits earned, tax credits, etcetera, that they don’t consider the actual earnings in continuing their employment. Investing those earnings can generate substantially more than social security. Also, more active retirees live longer, which also increases aggregate benefits.
Great point- obviously. In my case, I wouldn’t invest that money, but would pay off debts and that would be less to worry about paying later. That’s probably the first most important thing to do in planning for retirement.
Have been crunching the numbers here for my own situation and have a puzzlement. We did latest-point apply and delay (file and suspend), and my wife is getting x. I therefore figure on getting 2x next year when 70. However, when I do my actual earnings per above and also using the SS detailed calculator, it says quite a bit more than 2x next year. Hmm. What am I missing?
The spousal benefit is 50% of your Primary Insurance Amount AT FULL RETIREMENT AGE (assuming she also claimed at her full retirement age).
Your delayed benefit is 100% of your Primary Insurance Amount, plus 8%/year x 4 years = 32% delayed retirement credits.
So if her benefit is x (and she claimed at full retirement age), your benefit should be approximately 1.32 / 0.50 = 2.64x.
– Michael
Got it. Just did not realize the delta was that significant.
Thanks so much, again.
I just turned 66. If I keep working and do not collect SS until I’m 70, and have the same income for the next 4 years, my benefit will increase by $849 a month. If I start collecting now, and have the same income for the next 4 years, will my increase in benefits be the same, or do I need to go through the calculations in your article to figure the benefit?
Most of the increase you’re describing here by working for 4 more years while you wait for benefits actually has nothing to do with working for 4 more years, and everything to do with the 32% delayed retirement credits you earn by waiting.
If you want to isolate JUST the actual impact of the four more years of earnings, NOT including the delayed retirement credits, you need to go through the calculation here. You will likely find that the overwhelming majority of the increase is not actually related to working, just the delayed retirement credits for waiting (which is what you should get when you give up 4 years of checks – see https://www.kitces.com/blog/how-delaying-social-security-can-be-the-best-long-term-investment-or-annuity-money-can-buy/ )
– Michael
I will be turning 66 next July. I currently have been and will be making the highest pay ever [started about 4 years ago with a huge jump] of over $107,000+ and lasting at least till 70 years of age: some of the numbers are capped via their max amount figures per year, but it a good capping.
I have several years in my ‘highest 35 calculations’ history that are in the lousy average of $13,000 or less category: about seven of those years are in that figuring. They keep my average low…but how low in relations to working and drawing early?
HOWEVER, according to those years, 1977-1987, there were caps too. IF I continue as easily expected to make over $107k/year, how is my yearly pay replacing those lower years? as in, do they just get dropped and my new years are part of the 35 year higher figures to apply?
What I’m really getting at is…SEEMS I should draw my full retirement starting at 66, about $2,480[give/take] per year. Then, each subsequent year till I reach 70 [at the same pay +] get the SSA re-evaluation ‘boost’ each fiscal year end. I cannot tell, but it looks like I’m within a few basis points of the 8% gain by waiting [as you cleanly point out]. IF I ‘bury’/invest a portion in my 401k, I make instant 25/30% on Benefits because of State and Fed Tax savings and into a fixed interest 401k of 4% make at least . I can see zero downside to this formula.
However, I am having difficulty of calculating this figure. Waiting is an option as I need to work longer and the wages are there, but it seems I have the ability to gain about $30k/year [collect SS at 66], work full time, $107k/year wages, bury some of the benefits to make even more beyond the typical 8%, AND gain pension years ….just not sure IF I calculated it correctly: HELP…the calculator on the SS Site is not explicit enough to understand that is what I’m calculating [entered all the history and gave a retirement age of 70] and the figures are within $18/month of waiting to collect which is HUGE if correct to collect early —I would have 4 years x $30k+/year > $150k …[discounting tax savings and interest in a 401k plan]– YET I may be making a mistake.
thanks and hope for your response.
Rik G.
Rik,
The calcaution for SS benefit is based on your “highest 35 years” of earnings. So working longer when you are earnings higher will knock out some of the lower earnings years.
I think (now I’m not a planner, so you’ll want this confirmed) you should not take any benefits while you are continuing to work if you goal is maximizing your SS benefits. Delay to age 70 and you will get the largest benefit.
You strategy of taking benefits at age 66 and then get a “re-valuation boost” is something I have never heard of. To my understanding, the revaluation boost comes because you delay starting benefits.
Again, let’s see if people who do this for a living chime in.
Thanks for the quick reply. Reason I mention the ‘re-valuation’ boost, is a co-worker started at 66, makes the same pay as I, and nearing 68 next month…he is getting about $80 extra / month about every evaluation year/Oct-Nov. I need to take your advice and strictly evaluate the ‘low’ history years [they are in the less than $13k range over seven in the 35 year mix] to see the national wage index adjustment factor you mention and in relation to my case….as you, I might get a different answer from those that do this for a living….Probably should hire one anyway to make sure. again, thanks
I wonder if your co-workers revaluation adjustment of $80 per month is simply the Cost of Living Adjustment?
It seems to me that if you can work and earn the highest annual salary you’ve ever earned in any other year in your work history, then you should be able to delay claiming SS and take advantage of the ~8% per year bump that comes from waiting.
Keep in mind as well that 85% of your SS income will be taxable if you start taking benefits while you are continuing to earn a salary in excess of $100K per year – another good argument to wait if you ask me.
no. The COLA isn’t that high as in he just received a new adjustment for this year, 2016 and there was no COLA for 2016 and 2015. I’m on the line with SS now and they are trying to get me the Index Factor as their examples are not great. IF I can figure this out, it seems very good to take early and buffer some money into 401k, remain at a high pay supplanting older bad years and also getting med and pension coverage. Need someone to guide me through the nuances.
as for taxable, it would be any way thus the 401k. BUT in CA we are not taxed on SS.
OK, TOOK some time to figure out as gets into a hand calc for every year to figure the Index Factor per your 35 top years reported. Once I figured that calc, using the 60th year and that wage average to get the average for each year per the table, the factor of each of my years gave some interesting current values. Some of what I thought would be totally low years, actually when the factor was applied fell into an inclusion of a high year for the 35 year calculation. Adding up the adjusted totals for the 35 years, dividing by 35×12=420 gave my average figure [AIME], taking the year I turned 62 [geesch what a world] for the PIA formula and the BEND POINTS, I figured within a couple dollars which I will easily assume to my rounding skills as they do things with dimes vs near dollars etc….close enough as my figures matched their stated projection / month. THEN, whew, I projected different AIMEs based on replacement of my higher wages in order of logical replacement of the first 35 year set of high total year[s]…
RESULTS: NOT quite the bling I was wanting…NOT nearly enough near the 8% gain…only about $40/max/month. SO,
Unless you have truly near ZERO years [sadly even some of my $17k ones proved too high….never knew I lived that well back in the day…didn’t seem like it : ] you will not feel the average bar move.
I suggest if one want to replicate their projections to follow the steps like so:
1. print out your history record
2. create a 4 cell grid in a spread sheet for 40+ years.
col 1 = Year End Date reported
col 2 = your reported income from the history
col 3 = [your age 60 year’s [mine was 2011] National Wage Average Figure / the National Wage Average Figure for the YEAR you are wanting to figure out [say, 1989] = a FACTOR.
Take that factor and multiply it against your Historic figure from history in 1989 [ex]. =
Col 4 = your ADJUSTED Wage amount.
adding all of col 4 / 420 {that is 35 years times 12 months] gives you your AIME or lifetime average. That is what the PIA is calculated against [PIA is from age 62 [my case as I was born in 1951] which is the first year I could collect]]
SO, making MORE wages as author stipulates DOES sometimes make sense for higher wages [SS really punishes higher wage earners for SS] IF you have some cr@p years that make up, IMO, a huge portion of your 35 year calcs.
good luck
I’m waiting, My increase is average, compounded, of about $250/month every year = from 66 to 70 of an extra $980 at 70.
guess not too bad but that drifting on a boat tomorrow … on hold.
rik
I chimed in above..
Common sense for common workers.
Work & take benefts…
Here today, gone tomorrow…TAKE your bennys age 65.6 months. For most folks (average workers) that means for six months you’re under the $44880 limit, (or $22440 for 6 months.) Basically keeping 6 full months of pre-FR-Year bennys.
The “wait to 70” is nonsense. The cash recieved 65.6 to 70 takes 10.1 years to equal those 4.5 years of bank! You’de be 75.1 years old. ( 40 to 50% of you will be too sick or passed on.)
Bottomline: Enjoy your hard earned money…work after 65.6 to 70 if you like…or anywhere inbetween. But…Take your 50k a year and your NEW 40% wage increase. Don’t let the government con you into waiting to 70.
Life expectancy for someone who’s already reached age 65 is early-to-mid 80s. If as you note “you’d be 75.7 years old” to break even, the number who have passed on is dramatically lower than 40% to 50%.
That’s the whole point of why the delay makes sense. Because the average person who lives to life expectancy lives long enough to benefit from the delay. Literally, it’s an odds-on bet. (And EXPONENTIALLY better for those who outlive life expectancy, due to the compounding of Social Security COLAs on top – see https://www.kitces.com/blog/how-delaying-social-security-can-be-the-best-long-term-investment-or-annuity-money-can-buy/ )
– Michael
Just buried three friends, two were 66…
As a common worker..I’ll receive aprox. $2200 a month and work.
I’d rather invest that money into a rental in my area at $900 a month. Your return on each year you delay s.s. is about $120. My return is 7% to 10% plus the overage of my rent paid to me vs my mortgage on the property. This FAR exceeds $120. I find that a wiser use of social security windfall.
Also, unlike myself…many people have debt at 66. If I did I’d prefer to payoff those burdens with the remaining funds instead of pay interest on credit cards, etc.
I’d rather upgrade my current kitchen and 2 bathrooms as the best investment in my residence,
All these investments produce far more return in todays dollars.
Far more.
Strictly speaking, the relative value of delaying Social Security IS contingent on your assumption about the growth rate you could earn on the money. The highest your investment rate of return, the less valuable the decision to delay. Earning a 7% to 10% net return definitely pushes the breakeven further out, quite materially.
The caveat, for better or worse, is that delaying Social Security has no risk of roof repairs, water damage, bad tenants, or extended vacancies. 🙂 In other words, there is a prospective difference in returns, but also a difference in the underlying risk to earn those benefits.
– Michael
Not to mention the management time and effort. It all depends on how you want to spend your time.
To your expectation of 7-10% returns: Madoff consistently paid 10% returns and the government sued to recover the money earned by those who invested with Madoff using the reasoning that no one who was not aware that something was illegal should have expected such rosy returns. Look at 2-5% returns for the last 5 and next several years.
Have fun. I waited until 70. I had rental property for 5 years and that cured me of that project for the rest of my life. As a matter of fact, if I continued renting properties I am certain the stress would have prevented me from reaching 70. For me, not being a landlord is worth many tens of thousands of dollars per year.
I’very seen many people delay their Social Security benefits betting on outliving the time it takes to make up that money they could have been investing. Also seen their widow or widower showing up to file for the benefits their spouse never collected. I can only try to explain the pros and cons of each and then the retiree must make the ultimate decision. Never heard you didnt explain that when I filed. Look into that crystal ball and roll the dice.
By delaying my benefit until age 70, my monthly SS payment is $1000 more than it would have otherwise been if I retired at age 66. Had I taken the much smaller benefit earlier, I would have had to find a risk free investment that paid 8% per year with no management effort on my part. In addition, taking the benefit earlier would have pushed me into a higher income tax bracket since 85% of SS is taxable in my income bracket. Finally, because my health was generally good, I decided to delay my SS benefits to age 70. A back of the envelope calculation, not including the burden of added taxes, but giving myself a generous 5% per year return on each year of income, still showed that the break even point will come at approximately age 81. Because my spouse was a teacher, I am not able to claim the 50% spousal benefit. Having an additional $12K per year makes all the difference between a comfortable retirement and one on the edge. Clearly, this is not a universal rule. Each retiree will need to consider all the pros and cons as it works for their particular situation.
mostly accurate, but not so in the 8% return. The benefit does goes up 8% but that is the gotcha in the word problem. Since you are not getting the pior four years of income, the return is actually much less. Put differently, consider that the breakeven is 11 years (+/-) then 15 years of the lower age 66 benefit more or less equals 11 years of the higher age 70 benefit. So the “return” at the end of 15 years (66-81) is zero. The return does ratchet up every year thereafter, but it only gets up to 2 1/2 -3% if you live to your mid 90’s. So you start out with a negative return, breakeven at a zero return at 8 and then finally get it up to a 3% return in your late 90’s. That is not a good deal. The tax bracket thought is also more fluff than reality. The taxable amount of your benefit should not change your bracket unless you are already in a very low bracket to begin with, and even then it is only on the incremental dollars. If you can find any investment that pays a 3% return you are immediately and forever better off, plus you have the saved liquidity in your pocket from those first four years. Even the spousal benefit angle fails to change the result, since these benefits are based on the age 66 benefit amount even if benefits are not taken until 70.
Not as worried about a tax bracket change but an increase in Medicare premiums for two: $1300 after tax dollars and when the income does go down, it takes a lot of extra effort and a life changing event to make it happen. Not worth the aggro to me, but as I said, every has to work out their own calculation since there are many variables to consider.
Dude, if you and your wife are paying $1300 a month in Medicare premiums your income exceeds $750K per year; don’t sweat the few pennies difference in SS income between 66 and 70.
I am not following you. My 70 year old benefit is just over $800 a month more than my 66 year old benefit would have been. When I am 81, that $800 is 32% more each month, not 3%. Even if I would have had the mental strength to bank the whole 100K I would have gotten from 66 to 70, the additional amount I will get each month from SS will exceed the interest I would have gotten from the bank (the last few years less than 1%) or from a fixed interest fund (2%) in less than a year. Thereafter, each year I will be receiving 32% more than I would have if I was collecting my 66 year old benefit; that’s about 2.7% PER MONTH additional income, not 2.5 to 3% per year.
It’s not all about the deal bro…It’s also about what people are able to do and bear. If you’re at full retirement age without much savings, and did not earn a lot of money during your life time, It would not make any sense to start receiving benefits until age 70, unless you know you are not going to live long. Ten years ago I ran the numbers and found out break even was age 81 (11 years) and planned to start receiving at full retirement age. Now that I’m 65, I realize I will need more income in my 70s than I thought. I will wait until 70, and then I will probably still have to go to work, and give a lot of it all back.
We know all that; however, some of us will live to age 90 or even 100. Another thing you’re not considering is the amount of SS income at full retirement age will not cover living expenses for many people, and they may not have much money. Delaying reception of benefits and working until age 70 may give them the extra $500 they need to make living ends meet. It is very important to remember there is not a cookie cutter answer for everyone. Some advisors will lead people to believe there is…and no I won’t mention names.
Nice article, however, this and most other articles are silent on the actual mechanics of the PIA/AIME calculation, in terms of several aspects.
1) It is clarified that there are bend-points involved, and new bend-points are announced for each year. But for each beneficiary, are the bend-points fixed at some point? If so, when? In the year she/he turns 60, assuming the she/he continues to work past 60? Similar to when indexing earlier wages stops?
2) Does the SSA ever stop calculating the PIA/AIME for a beneficiary?
3) Once a beneficiary starts collecting SS benefits, how are COLA adjustments made to the monthly payments? There is a calculation involving the 1st 3 months of every year, but no clear examples are shown anywhere, showing how PIA is affected, for people who have started collecting SS benefits and those who are eligible, but have not started collecting benefits.
Thanks!
I need a straight answer, if that is possible with the Feds: I am almost 70, and have worked and have paid into SS for almost fie years. When I reach 70, will SS re figure my monthly check in include those five years?
Every one of those years where your monthly income exceeded the inflation adjusted monthly income of one of the years in your 35 year earnings income would be used to raise your benefit.
I was planning on talking my social security at age 65, Aug.1 of 2017. I am currently working and my net is approximately 1,478.00 monthly ( I work part time job). Will continuing to work affect my SS payment? Should I just quit working in August? How long does it take to receive SS after applying?
Only if you have years in your 35 year earnings record where your inflation adjusted income was considerably less than $1478 per month.
It was odd to learn that the Base Year (year of first month at age 60) for PIA and AIME calculation is NOT the year used to determine Bend Points. Bend Point year is the year of the first month of eligibility (year of first month at age 62). Bend Points are used to calculate the monthly benefit (90% of AIME$ to First bend Point; 32% of AIME$ between First and Second Bend Points; and, 15% of AIME$ in excess of Second Bend Point). Between your article and links to SS documents, I was able to calculate my monthly benefit, exactly matching my SS Benefits Statement. It was very satisfying spreadsheet work.
The bend point is based upon your highest 35 years of income and is calculated when you retire, i.e. at 66 if retiring at 66, at 70 if retiring at 70. If you continue to work full-time until you retire and are earning more than your 35 year average, your SS benefit will increase every year you continue to work, in addition to the 8% extra for each year you wait to collect. If, for some reason, you stop earning income at age 60 but don’t apply for SS until you are 66, your bend point calculation at 66 will be the same as if your bend point was calculated at age 60 since your 35 year average will have remained unchanged during those 6 years.
So ones bend points are permanently set at the values for the year in which one retires ?
It would be great to add a real calculator to this article!
Thanks Michael, a great article! After reading your entire article a bell went off in my head.
Just this past Friday I applied for my social security at 68. My wife just turned 66 and applied the same day as me. She’s taking half of mine on the “Restricted Application Strategy”. She can then take her full when she turns 70. I’m self employed and plan to work for another 5 years or so. My wife and I file jointly. Question! Her wages over the years were pretty low (averaged about $12,000), so her full SS at 70 is going to be about $1400. I could easily give her a good amount of income over the next 4 years, and have her pay into social security again. The amounts I would give her would be a lot higher than what she averaged over the last 32 years. It would be self employment income like I take, or I guess I could just pay her a salary for the next 4 years.
My question! Would those 4 years of income raise her SS benefit at 70 substantially over the $1400 she is expecting to get? She has 32 years where she made something, and a bunch of years where she made nothing. Do you think this strategy could make a big difference for us?
All the best, Wally S.
I had the biggest shock of my life. When I reached full retirement age, was collectinf SS, I got called back to my previous job, ended up making $135,000 that year and I was under the impression my Social Security benefits would probably go up because I was paying into it….no, just the opposite.. They shot a big hole in my expected direct deposit because of some BS called MAGI. So, no they didn’t take anything away from my benefit amount they just added on a huge amount for Medicare so beware of working when your collecting Social Security you might be in for a big shock. They ended up with holding one complete social security check to pay back for all of the Magi crap from 2 years prior.
If one first begins to accept Social Security benefits at the full-retirement age of 66 and thereafter continues to work but does not attempt to earn as much money as in prior years, does the formula also allow for diminution of the monthly Social Security benefit amount?
you cant work and get SS?
If you start Social Security benefits EARLY (before full retirement age) while you work, your benefits may be reduced under the earnings test.
There is no reduction on Social Security benefits, regardless of continued work, once you reach full retirement age.
– Michael
You can work and get SS, but if you are younger than your max retirement age (for me 66) there is a maximum amount you can earn before your SS begins to be reduced; the more you make above that amount, the more your SS is reduced. After your max retirement age, you can earn an unlimited amount and still collect your full SS. As a matter of fact, each of those years you earn an amount that is higher than one of the inflation adjusted years in your 35 year average will increase your SS benefit. The greater the difference and the lower your 35 year average, the greater the increase.
I am 72 years old, receiving SS benefits. I will be going back to work either as an employee or as an independent contractor, my choice. If I’m an employee again paying into SS and medicare, will my benefits increase or does it make any difference?
It is based on highest 35 years or earnings.(not consecutively) If you go back to work, every year you make more than the lowest of those 35 years will be replaced with a higher earning year. It could increase your benefit.
So, this is all well and good, but how does one discuss this with the SSA? For instance, I have incomes lately (currently age 70) that exceed some of my 35 year incomes originally used by the SSA. Who do I contact to review this? (The SSA has sent me the “proposed” benefits for 2018 and they are the same as previously – I just filed 5 years tax returns late…) ????
So, if I took SS early at 62 and I have several years where I make more than the maximum earnings allowed before they take 50% of my earnings over the maximum limit, how will the delayed credits to my account be doled out back to me?? How do they calculate giving you back the amount they took from you because you were making more than the annual maximum limit, which for 2017 was $16,920? I know they won’t begin the payback until my full retirement age of 66, but how do they calculate my new amount? Do they do it all at once or does it become part of my ongoing benefit? I will be 65 in 2018.
i have the added complexity of being subject to WEP because I am collecting a pension from Canada. I could take full social security now (age 66) BUT it will be reduced by WEP. I’m at 21 years of social security earnings so if I continue to work, and meet the substantial earnings test, the WEP will be reduced each year I work. If i claim SS benefits now, and continue to work, will they still reduce the WEP for each year of additional work?
Thank you for this discussion.
I just signed up for ss and have to keep working. I work for myself and will keep working for for many years. I am 66 and will 67 the month I start collecting. What I want to confirm is that my social security benefits with my income will be my total income. Seeing that it will take my yearly income up
About 16,000.00 will that increase my future benefits? I was hoping to put 6,000 a year in my personal 401k
Thank you for your help
L rodgers
Great article, and I appreciate the detail! One question: It sounds like the added earnings after retirement only “count” up to the full amount taxable under social security. So anything more than that will have no impact. For example, if someone earns say $150,000 a year, the recalculation will not include any amount earned that exceeds what is taxable for SS. Is this correct?
Age 70 is the must to file weather you continue working or not. The SS Benefit will be an added bonus to your salary but remember the tax man!
Exactly so. This years taxable maximum is $133,000 so only the difference between the $133,000 and your lowest year will be used to increase your 35 year average.
Very helpful in understanding my situation to increase my SS retirement benefits as I continue to work replacing old low income earnings with new higher earnings. My SS has gone from $1,394 in 2014 to $1,828 in 2019! I heard of this before, but now you have explained it in perfect detail. Thank you. Great job, Mr Kitces!
I’m 66 and took my social security it was reduced due to WEP. But I now have 35 years. I got rid of four zeros to get here. My question is I work PT usher, my history has some low figures where I was in college and only earned part time Christmas help twice like $397.00 and $257.00 if I work at PT job and replace those with say $5500 will it bring mine up some. Second I transfered to FERS in 1998…So I have 19 CSRS and and 18 FERS, they claimed we would not be subject to WEP? I get SSA, reduced, OPM slightly reduced, USher check and TSP ..so still ahead. I mixed up my TSP two cover more bases during the possible Biden Admin. Funds C, G, F, I, and S. At 40, 20,20, 10 and 10…
Started collecting SSA in March and still working fulltime. When do they recalculate your benefit and increase your payment if an adjustment is warranted?
Hi, II one has only 12 years or 48 quarters, would the average income be calculated dividing by 35 or 12 please? I’m now 72 years old and am filling for retirement. The rest I’ve worked in other countries without mutual tax sharing agreement with the States thus, it won’t be considered and added to my 12 years.
You should have dividend stocks who pay over 4% to supplement your income .I have 27 high dividend stocks who pay me thousands in income a year. You reinvest the dividends and your income keeps multiplying. Very simple and many people don’t do it!
You should have dividend stocks who pay over 4% to supplement your income .I have 27 high dividend stocks who pay me thousands in income a year. You reinvest the dividends and your income keeps multiplying. Very simple and many people don’t do it!
Yours is the first article that addressed continuing to work. It makes the future 4 years exciting. i can start taking benefits in January of 2025. In addition, I will max out my 403B, my FSA, increase my final payout of my pension and invest in an AUD.