If you retire and file for Social Security and then later decide to return to work, will your Social Security benefit increase to reflect the taxes you’re paying? Or do all those tax dollars just go down the drain?
The answer depends on two things:
1) Your earnings history
2) How much you are making now
Your Benefit Calculation
Your Social Security benefit is the result of a fairly complex calculation. Understanding how additional work will impact that benefit is easier if you understand the first two steps of the formula.
Step 1) All of your prior earnings are adjusted for inflation at age 60. This adjustment is meant to ensure that your Social Security benefit reflects today’s cost of living. If your benefit was based on your actual non-inflation adjusted earnings, it would be much lower.
For example, if you earned $12,000 in 1980, they multiply it by 3.5871901 to get the inflation adjusted earnings of $43,046.28. The money you earn beyond age 60 is not adjusted for inflation, but added to your earnings history report at actual face value.
If you want to see the inflation adjustment numbers for yourself, there is a tool on the Social Security website.
Step 2) After the Social Security Administration inflates your historical earnings to represent today’s cost of living, they pick out the highest 35 years. If you have less than 35 years of earnings, they will still use 35 years, but will substitute zeros where there should be earnings.
Once they have chosen the highest 35 years, they simply add them up. Since the goal is to obtain a monthly number, they divide the sum by 420 (the number of months in 35 years). The result is the average amount of inflation-adjusted earnings during each month of your highest 35 years of earnings. The Social Security Administration refers to this number as “Average Indexed Monthly Earnings” or more commonly by its acronym, “AIME.”
For a full description of how your benefit is calculated, see Behind The Curtain: How They Calculate Social Security Benefits
What It Takes to Increase Your Benefit
Unlike the benefit calculation, the rule for increasing your benefit after you have elected is not complex. Simply stated, if you are still working and your earnings exceed any of the highest 35 years, your benefit will be recalculated and will increase.
This is especially beneficial for those who had periods of low earnings or less than 35 years of work history. In a prior article I pointed out that a single year with a zero in earnings can make a difference of $100 per month (or more!) in your benefit amount. Over your lifetime, that could be nearly $30,000 in benefits. If you want to see that article, visit Check Your Social Security Earnings Statement Before It’s TOO LATE
To check your historical earnings, you’ll need to create a My Social Security account at www.ssa.gov/myaccount. You’ll need to provide a Social Security number, mailing address and a valid e-mail address. You’ll also need to be able to answer questions that only you are likely to know and it needs to match the information on file with Social Security. Just bear in mind that the earnings listed do not show the inflation adjustment. You’ll have to do that yourself with this calculator.
I’ve heard lots of misinformation about this topic so I’m really curious, does this information differ from what you’ve heard before?