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Working to increase social security benefitsSubmitted by Townsend Asset Management Corp. on February 15th, 2016
There are three significant ages to keep in mind when you consider Social Security retirement benefits.
Age 62 is the youngest age for claiming retirement benefits. But, if you claim at 62, or any age before your “full retirement age” your benefit will be reduced.
Age 66 (increases gradually up to 67 for those born in 1960 or later) is the full retirement age, which means there is no reduction in benefits if you wait until at least this age to begin receiving.
Age 70 is the latest you can wait and receive delayed retirement credits of 8% per year.
For some, their cash flow needs and financial circumstances dictate the necessity to begin receiving Social Security at age 62, despite the reduction in benefits. For others, the opportunity of seeing their Social Security retirement benefit grow at 8% per year is an attractive incentive to delay their benefits up to age 70, assuming their financial status allows this flexibility.
Regardless of your decision of the age you begin receiving Social Security, there is another factor to consider. Even while you are receiving benefits, additional years of working may increase those benefits.
Here is how it works:
Unlike corporate or governmental pension plans that often base retirement pensions on the last 3 or 4 years of a worker’s earnings, Social Security looks at your entire lifetime of earnings. From these years of working, they choose the highest 35 years of earnings and use them to determine your benefit.
Now, the wages you earned 20 or 30 years ago were probably much lower than your current wages, for two reasons. First, you were just starting out in your career, so naturally the income was lower. Second, wages – just like the cost of living – were less many years ago, but are higher today due to inflation. Therefore, the Social Security benefit calculation takes into account this inflationary difference and increases your old wages by a factor to make them more comparable to today’s cost of living.
But, even after making this inflation adjustment to wages, you may find several years of old wages that are still not as high as what you might currently earn if you continue working during your retirement years.
In addition, your earned income might have declined for some years as you went back to school, stayed home to raise a family, or were underemployed.
For example, assume you have worked for 40 years. Social Security selects the highest 35 of those years to calculate your benefit. But, if you could work for 5 more years, even while receiving benefits, perhaps those additional 5 years could replace 5 lower earning years in that 35 year calculation. In that case, your monthly benefit will increase.
Each year, Social Security provides a statement that shows the history for each year of your lifetime earnings. Their website also provides the inflation indexing factors they use to adjust your historical wages. If you are considering working during retirement, you may want to do a quick calculation to see if that additional work will also contribute to a larger Social Security check.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm offering comprehensive wealth management expertise to its clients. Email Gerald@AssetMgr.com for more information. For the latest news and updates, follow Townsend's growing platforms on Linked In, Facebook and Twitter.