Retirement isn’t always final. Often, individuals will retire and file for Social Security and later decide they’d like to continue working for a while longer. When this happens, it typically leads to a few questions about the impact to their Social Security benefit.
One of the most common questions is, “what happens if you file for Social Security, but keep working? Could your benefits increase?”
I’ve also heard, “what if I’m making less in my ‘post-retirement’ job, could my Social Security benefit decrease?”
The short and sweet answer to both of these questions is that your continued work could result in a benefits increase, but not a decrease.
To fully understand this, it helps to have a basic knowledge of the Social Security formula. (If you’d like to get into the fine details, check out this video I made on the topic.)
Here’s the quick summary of how benefits are calculated.
Will Future Earnings Be Counted for Social Security?
At age 62 your benefit is calculated using the formula that’s specified for those turning 62 in that calendar year. But before the Social Security Administration can run this calculation, they have to calculate your personal earnings history.
This is accomplished by taking all your earnings through age 59 and adjusting them to account for inflation. Any earnings at 60 and beyond are used at face value.
Once they’ve built your prior earnings record they take out the highest 35 years. If you didn’t work enough to have 35 years of earnings, the calculation will still include 35 years, it’ll just use zeroes in the years of no work. So for example, if you only worked for 25 years, your benefits will be calculated with 25 years of earnings and 10 years of zeroes. Just remember that on the other side, if you worked for 45 years, only the top 35 years are used.
So now that you know it’s your highest 35 years of earnings that are used, understanding how your benefit may change with continued work simply becomes an issue of comparing what you are making today with the earnings in your list of 35 years of inflation-indexed earnings.
If your current earnings exceed one of the years in your list of 35, your benefit will be recomputed and your benefit will increase.
Keep in mind that you’re comparing your current earnings to your prior earnings after those prior earnings have been adjusted for inflation so one of the most important steps is to understand how to apply that inflation adjustment. Don’t worry…it’s actually pretty easy with a simple calculator.
First you want to get your earnings history from the social security administration. This is typically page three of your benefits estimate and you can print that on your mySSA account.
Will Working In Retirement Increase Your Social Security Benefit?
Once you have your earnings history you’ll want to go over to the SSA website and get the inflation indexing factors that are specific to the year you turned 62. All you need to do is put in the calendar year you turned 62 and it’ll instantly give you all the indexing factors. Then all you have to do is take your real earnings, multiply by the factor shown for each year.
From that point it’s a simple matter of figuring out which years are your highest 35 and crossing out the other. This will give you your list of earnings that you can use to compare any future earnings.
If your current or future earnings will be higher than any of the adjusted earnings in your list of 35, the lower earnings year will be replaced. With a lower year falling off, and a higher year added, the overall average 35-year earnings will increase. Then your benefit will be recomputed using the same formula used when your benefit was calculated (the formula in place the year you turned 62).
That’s the basics of how it works, but this still leaves plenty of questions.
Can a recomputation decrease my Social Security benefit?
No, a recomputation will only be applied if your primary insurance amount can be increased by at least one dollar.
Is a recomputation of benefits the same as a recalculation of benefits?
In the normal world we live in those two terms are synonymous. That’s not the case with the Social Security Administration. As noted above, a recomputation can only increase your benefit. A recalculation can increase or decrease it. The Code of Federal regulations says, “Unlike recomputations, which may only service to increase your primary insurance amount, recalculations may serve to either increase or reduce it.”
Typically, a recalculation is due to an error in the original calculation.
How common is a recomputation of benefits?
It’s actually VERY common. In fact, nearly everyone has at least one benefits recomputation.
This is because of how your earnings are reported to the SSA. In most cases your benefit calculation does not include your prior year of earnings because these earnings are not reported to the Administration until the fall of the following year. For example, earnings for 2020 won’t be reported until the fall of 2021.
The Code of Federal Regulations says, “Because of the way reports of earnings are required to be submitted to us for years after 1977, the earnings you have in the year before you become entitled to old-age insurance benefits, or become disabled or in the year you die might not be reported to us in time to use them in computing your primary insurance amount. We recompute your primary insurance amount based on the new earnings information and begin paying you (or your survivors) the higher benefits based on the additional earnings, beginning with the month you became entitled or died.”
Is a recomputation automatic?
The recomputation process is supposed to be automatic. According to the rules they say “when a recomputation is called for, we perform it automatically.” But, as you may have guessed, there are sometimes a few hiccups in this system. So you don’t have to wait on they to initiate their “automatic” process. You can request this recomputation with evidence that you have earnings in addition to what they used when they calculated your benefit. You would simply need to visit a Social Security office to get this started.
Can a recomputation pay you retroactively?
If the Social Security Administration performs a recomputation and finds that your benefit should increase, the increase will be paid back to January of that year. For example, your earnings for 2020 will become available for a recomputation around September of 2021. In this example, the benefits increase would be paid retroactively from January of 2021.
Don’t forget about the earnings test!
If you file for Social Security before your full retirement age and keep working, keep in mind the earnings limit will apply to you. You need to make sure you don’t run afoul of these rules.
If you still have questions, you could leave a comment below, but I don’t get to check those very often. What may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too.
You should also consider joining the 125,000+ subscribers on my Social Security Intelligence YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage.
If you want to see some of the work I do in the broader retirement planning space, you should check out my Big Picture Retirement YouTube channel. This is a brand new platform where I, along with attorney John Ross, talk about all the factors impacting your successful retirement.
One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.
Here are a few additional helpful resources if you’d like to research the topic we’ve discussed in this article.
GET YOUR INDEXING FACTORS HERE
Code of Federal Regulations 404.281 – 404.288 Recomputations
Code of Federal Regulations 404.290 Recalculations
SSA webpage on bendpoints
POMS RS 00605.580 Recalculation of Benefits
POMS RS 01404.005 Lag Period – and Lag Earnings
SSA Webpage on how to calculate your benefit
CRS Report: How Social Security Benefits Are Computed