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Pushing Off Retirement

By Dr. Jeffrey Miller

Most people know that working beyond full retirement age will yield bigger Social Security checks, but here’s another reason why working longer can have a bigger payoff.

Heads up to women who entered the workforce after they raised their families, immigrants, and other late entrants into the U.S. workforce. Workers with a history of part-time or low compensation employment now enjoying significantly higher pay also take heed.

There are two important thresholds regarding length of employment to know: 10 and 35 years.

First, a worker must have paid into the Social Security system for 40 quarters (10 years) to receive any benefits at all. Therefore, if possible, it is imperative to continue to work until the 40 quarter requirement is met. Even a small benefit is a windfall in comparison with no benefit.

Second, Social Security determines retirement benefits by looking at a worker’s 35 years of highest earnings. After reaching your 40 quarter goal, the next goal is to create the best record possible to calculate your Primary Insurance Amount (PIA), Social Security’s mechanism to determine retirement benefits.

Say a worker who qualifies for benefits with the minimum 40 quarters (10 years) of earnings presents a record with 25 years of zeros in the calculation of the PIA. With every year of work, one of the zeros is replaced with a positive number that enhances the record. Continuing to work could raise benefits significantly. For example, if you have worked for 10 years with a salary of $10,000 a year and decide to work for another year at the same salary, you could receive another $5,000 in benefits over the first 20 years of retirement.

This principle applies to many who for any reason fall short of 35 years of covered employment. Examples: women who raised families before joining the workforce, immigrants whose U.S. employment covers only part of their working lives, certain federal, state, and local workers.

Even for those who have worked more than 35 years, the PIA will  increase if current earnings are higher than earnings in some previous years. Because Social Security takes the 35 years with highest earnings, continuing to work could eliminate from the calculation years of low earnings. This could easily be the case if you worked part-time some years.

Your Social Security Statement shows your work history so you can see which years of low earnings might be replaced with higher earnings if you continue to work. Be cautious, however – Social Security adjusts earnings in past years for wage inflation. For example, wages for 1974 will be multiplied by a factor of more than five when entered into the PIA calculation. For some workers, the greatest benefit of continued work is that the income makes it possible to delay claiming benefits. In that case, the bonus of waiting to claim is that benefits will go up 8% each year beyond a worker’s full retirement age until age 70.

Dr. Miller is a founding partner of Soc-Sec Analytics (www.socialsecuritychoices.com), a financial advisory service specializing in Social Security issues and is Professor of Economics Emeritus at the University of Delaware. Send your questions to questions@vitalmagonline.com.

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