One of our clients asked a great question that other day as we met to discuss retirement plans with her and her husband.
At age 60, she is not yet old enough to start claiming her Social Security benefits (that starts at age 62).
But she wanted to know if switching from full-time to part-time work for a couple years could cause her future Social Security benefits to shrink.
The answer is that it shouldn’t. Here’s why.
Social Security benefits are based on your highest 35 years of earnings covered by the Social Security system (a few types of workers do not pay into Social Security, but almost 90% of workers are now under the Social Security umbrella). Those earnings are also indexed for inflation, so that small salary you earned over 30 years ago when you were just starting out will be bumped up to account for inflation over the years.
By the way, those 35 years of earnings need not be consecutive. The Social Security Administration will review your history of earnings to pick out the top 35, adjusting for inflation.
If you don’t have 35 years of earnings, the missing years will be assigned a $0 value. Clearly, the more years of earnings you have, and the more you earned, the higher your potential benefits.
Earning less – for example, by switching to part-time work or quitting early – won’t necessarily hurt you, as long as you have enough other years with higher earnings that can be factored into the 35-year calculation.
The Takeaway: If you want to maximize your Social Security benefits, the factor with the greatest impact is actually when you start claiming.
Taking benefits at Full Retirement Age (generally age 66 to 67) will earn you your “full” benefit. Waiting to claim until age 70 can inflate your benefits by up to 30% each and every year.
On the flip side, claiming benefits as early as 62 can lead to a permanent haircut of up to 30% in yearly benefits. That means, for example, that $1,000 in monthly benefits could be reduced to as little as $700 if taken early.
A worker born in 1960, for example, can increase her benefits by a whopping 77% each year by delaying from age 62 to age 70. If you’re trying to maximize your retirement income, that’s something you’ll want to keep in mind.
Before you retire, ask us to review different Social Security claiming scenarios with you so you can make the best decision.