When making decisions about retirement, some clients might benefit from considering the power of continuing to work for a few more years.
For some people, especially those who had years in their work history of little or no earnings, adding more years of earnings may substantially increase their Social Security benefit.
Take myself for example:
In 2008, the year I turned 62, I calculated my Primary Insurance Amount (PIA) by hand. I retrieved my earnings record from my Social Security statement, obtained the indexing factors for my age cohort, added up the highest 35 years of indexed earnings, divided by 420 to find the Average Indexed Monthly Earnings (AIME), and applied the bend points to arrive at my PIA.
Here’s what it looked like:
Total earnings: $2,359,803
AIME: $5,619
Bend points for my 1946 cohort: $711 and $4,288
PIA formula:
$711 x .90 = $639.90
$3,577 x .32 = $1,144.64
$1,331 x .15 = $199.59
Total = $1,984.13
PIA: $1,984.10
This would be the amount I would receive if I stopped working at age 62 and claimed my benefit at my full retirement age of 66. My statement that year showed a Full Retirement Age (FRA) benefit of $2,089, assuming four more years of earnings to age 66.
Although I could have claimed my benefit as early as age 62 (the amount would have been 75% of my PIA, or $1,488), I knew better than to do that, mainly because I was still working and the entire benefit would have been withheld for the earnings test.
Also, claiming my benefit at 62 would have precluded me from claiming a spousal benefit at 66—a strategy that is no longer allowed. Because I was grandfathered under the old rules, I was able to claim 50% of my ex-husband’s PIA at 66 while allowing my own benefit to grow. A year later he died. The spousal benefit converted to a survivor benefit and the monthly amount doubled.
From age 66–70 I received nearly $100,000 in spousal and survivor benefits without touching my own benefit. When I claimed my benefit at 70 it included eight years of COLAs and four years of 8% annual delayed retirement credits—plus, my PIA had been recalculated every year to take into account my latest earnings.
You see, my 35-year-earnings record had some zeroes and low-earning years from when I stayed home with my kids and had a few years of meager earnings as a freelance writer. So, by continuing to work into my 60s and 70s, my earnings record was being improved. Each year, some months after earnings were reported, I got a letter from the Social Security Administration saying my monthly benefit would be going up by about $25 or $30, retroactive to January.
Today my Social Security benefit is $4,658 per month.
The power of earnings
How did it get from a PIA of $1,984 to a current benefit of $4,658? Three things: COLAs, delayed retirement credits (DRCs), and earnings. Of the three, earnings had the greatest impact.
Here’s how it breaks down:
$1,984 — Original PIA in 2008
$841 — Cost-of-living adjustments 2008–2024, compounded
$635 — Delayed retirement credits, 8% per year for four years
$1,198 — Additional earnings
$4,658 — Today’s monthly benefit
This is why I like to say I’m the poster child for maximizing Social Security benefits: I claimed my survivor benefit at 67 without opening my own record, filed for my own maximum benefit at 70, and have kept working.
To be honest, when I was in my late 50s and early 60s I didn’t know how I was ever going to be able to retire. With modest savings and a Social Security benefit that didn’t come close to meeting all of my expenses, I couldn’t envision ever retiring. So of course I didn’t.
I have kept working, and the earnings have not only allowed me to live comfortably and stash more away in retirement accounts, they’ve also greatly expanded my Social Security benefit.
We give a lot of credit to the 8% annual DRCs and the COLAs, but as you can see, my continued earnings have had the biggest impact on my benefit increase from age 62 to 70.
Who does this help the most?
Now, before I issue blanket advice to everyone to keep working into their 70s (which I would love to do, especially for baby boomer women with less-than-maximum earnings records), I would be the first to acknowledge that not everyone can do this.
Some physically demanding jobs do not allow for much work past age 62. People in their 60s who lose their jobs due to layoffs or for health reasons may not be able to find high-paying work. Some people are just tired. And I realize that “keep working” is not the kind of retirement advice clients want to hear from their financial advisor.
But the other reality we must consider is longevity. Life expectancy for a 62-year-old male is about 81; for a female 84. Half of us will live longer than this. Some of us will live much longer.
I get that people in their 60s are tired of working, but how do they propose to fund a 20- or 30-year retirement if they have no earnings after age 62, especially when you take inflation into account?
Some retirees work part-time. This helps preserve retirement assets but it does nothing to increase Social Security. To increase Social Security beyond COLAs and the three years of 8% DRCs (for FRA of 67), you need to be replacing earlier years of lower earnings with later years of higher earnings.
Now granted, there are diminishing returns for clients with 35 years of maximum earnings. They can still improve their benefit by continuing to work.
Important: But the biggest beneficiaries of continued employment are those baby boomer women who took time off to raise kids or had low-paying jobs. (I’m mainly referring to lower-earning spouses whose own benefits are high enough not to qualify for a spousal benefit.)
If presented with the choice of working a few more years in their 60s versus living with financial anxiety and the possibility of having to scrape up more income in their 70s or 80s, it might make the idea of working a little longer more palatable.
Anyway, that’s my experience, for what it’s worth. Looking back, I have no regrets.
My decision to leave the brokerage industry in the 1980s to become a freelance writer caused a setback financially, but I’m making up for it now, not only through continued saving and the higher Social Security benefit, but also through the work itself, which hopefully is doing some good.
I’m just imagining the many clients of our Savvy Social Security members deciding to claim later and maybe keep working to improve their overall financial security. This is at least as satisfying as watching my own Social Security benefit grow higher each year.