Ask the Boston Money Coach
Question.) I retired at age 55 and am returning to work. How will this affect my Social Security Benefits at age 67? Betty in Florida
Response from Boston Money Coach Steve Stanganelli:
Your benefits from Social Security are based on your lifetime earnings. Your income taxes on Social Security benefits will depend on your age and your current earnings. That’s a separate matter I’ll address in another post.
The key drivers for benefits will be how much you earned in the past, how much you’re earning now if still employed, and when you take benefits relative to your Full Retirement Age.
The general rules are these.
- The higher your lifetime earnings, the higher your likely benefits
- The longer you delay taking benefits, the higher the amount you can claim
- Conversely, the sooner you take your benefits, the lower your monthly benefit will be
- If you are married or are divorced and were married for more than 10 years, you may be eligible to have your benefit based on your spouse’s or former spouse’s benefit
- If you are or were a government employee and are eligible for a pension, you may be eligible for a reduced benefit if at all
Your benefits are based on the highest 35 years of earnings. To calculate benefits these earnings are adjusted for inflation to today’s dollars. Then the earnings used for the benefit calculation is capped based on the maximum amount subjected to Social Security taxes. After calculating the average inflation-indexed monthly earnings, a formula is used to determine your Primary Insurance Amount (PIA).
Computing Your Primary Insurance Amount: An Example
Everything is based on this inflation-indexed monthly earnings number calculated from your highest 35 years of earnings.
Then you can use the following guide to figure your estimated Social Security benefit:
- 90% of the first $749 plus
- 32% of the amount between $749 and $4577, plus
- 15% of the amount over $4,517
Note that the maximum benefit regardless of the indexed monthly earnings number calculated was $2,366 per month in 2011. This maximum amount goes up as benefits are adjusted by the prevailing Cost of Living Allowance (COLA) for the benefit year.
Impact of Work on Benefits
So what is the impact of work on your Social Security benefits? That depends.
If you haven’t yet started receiving your benefits, then your earnings will be added to your total lifetime record and be used to calculate the indexed monthly average noted above. If your current earned income is greater than a prior year’s income, it may be used as part of the highest 35 years of earnings for this calculation. If it is lower, then not to worry. Only the highest earning years will be used.
The one benefit you get for working in this case may be the fact that you can afford to delay receiving your benefits from Social Security. It generally works out that for every year you start before reaching your Full Retirement Age, your benefit is reduced by about 8%. So by delaying receipt to your Full Retirement Age (which may be 67 depending on when you were born), you’ll maintain your expected benefits. And if you continue to work past your Full Retirement Age or draw on other resources before claiming Social Security, you’ll be eligible for a higher current base benefit if you delay starting. So you give yourself a raise of about 8% and the higher base factors in to higher lifetime benefits.
If you have started receiving benefits and are working, your benefits could be reduced. And a portion of Social Security Benefits may be taxable depending on your total adjusted gross income and your marital status.