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If you understand the way the benefit is calculated, you can estimate the consequences of working an additional year.
In general, you need 10 years of substantial earnings to qualify for a retirement benefit under social security. (You also have to be over 62 years of age and file an application.) Working additional years can qualify you for a higher benefit, even if you're already receiving social security retirement benefits. The amount of added benefit can vary greatly, though, depending on your work history. Because of the way the social security benefit calculation works, you may get a big boost in your benefit, a small boost, or no boost at all. There are two main factors here:
Naturally, there are many other factors that may be equally important in determining whether you want to continue working (or return to work). We're just looking at one issue: how it will affect your social security retirement benefit.
The discussion on this page will be easier to understand if you have read this page about how your retirement benefit is calculated.
Having another year of earnings won't reduce your retirement benefit. You don't have to worry about dragging your average down, because your retirement benefit is always calculated on the basis of the 35 highest years, determined after applying inflation adjustments. Your additional year will go into the formula only if it would bring your average up, not if it would bring your average down.
Example 1: You've worked 33 years with earnings at a high level, and now you're going to either work part time with a low level of earnings or stop working altogether. The calculation takes 35 years into account even though you worked fewer years. That means the formula includes two years with zero earnings. By working part time, you'll replace a year of zero earnings with a year that has at least some earnings, and your social security retirement benefit will increase.
Example 2: You've worked 35 years with earnings at a high level, and now you're going to either work part time with a low level of earnings or stop working altogether. If you work part time and have earnings lower than the lowest year in your prior history, the additional year will be ignored because it isn't one of the 35 highest years. It won't increase your benefit, but it won't reduce your benefit, either.
If you have earnings during a year when you're receiving early retirement benefits, the earnings test can cause a reduction in your social security benefits for that year. This will not affect your permanent benefit, however.
As you can see from the examples above, you get an increase in your social security retirement benefit only if your additional year of earnings replaces a year when the earnings were smaller. You can be sure this is the case if your prior history includes fewer than 35 years of earnings, because that means your additional year of earnings will replace a year of zero earnings.
Example: Looking at the annual statement you receive from the Social Security Administration, you see that you have fewer than 35 years with earnings that count toward your retirement benefit. You are considering working an additional year when you expect to earn $42,000.
With fewer than 35 years of earnings, the benefit calculation will include some years of zero earnings. Working the additional year will increase your total by $42,000. Divide by 420 (the number of months in 35 years) to determine that your average indexed monthly earnings will increase by $100.
We still have to apply the benefit formula to see how this $100 increase in AIME will affect your benefit. We'll get to that later.
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