My 69-year-old husband took Social Security 2 years ago after he retired from his job. He opened a small consulting business to keep busy. His biggest client is his former boss, who retired at the same time he did and purchased a couple of franchise sandwich shops. My husband is an accountant, and he helps his boss do the kind of accounting work that is beyond the experience of his regular bookkeeper.
The benefits are good. He works when and where he wants. Work keeps him out of my hair. He enjoys bemoaning the lousy Lions with old friends over lunch. And he makes a little money.
This week, we discovered another advantage. Jim got a letter from Social Security saying that he was getting a 3.8% raise because his pay in 2014 had been high enough to erase one of the 35 years of lower-paid work on which his Social Security benefit is based. While 3.8% isn't a fortune, it is a nice increase, especially in a year when there is no Social Security cost-of-living adjustment. We went out for dinner to celebrate.
Are you in line for a pay raise?
If you are curious about how this works, it helps to understand how Social Security is computed. Social Security explains: "The primary Social Security benefit is based on average lifetime earnings, adjusted for wage growth, called the average indexed monthly earnings, or AIME. The computation period is the number of years of earnings used to calculate the AIME. Under current law, yearly earnings are adjusted for wage growth and the highest 35 years are averaged and divided by 12 to produce the AIME. If workers have fewer than 35 years of earnings, the adjusted earnings (including years with zero earnings) are averaged over 35 years; multiple years with no earnings can substantially reduce the AIME."
In other words, anyone who can replace a zero year or a very low-earning year with a higher-earning year will see a benefit increase.
Kaye Thomas, a tax attorney and author for Fairmark, a financial publisher, has examined the effect of continuing to work while on Social Security. He points out that it can be difficult to predict how much difference additional work will have on your benefits unless you are willing to go through several complex mathematical steps. "How much you'll get is very dependent on where you are at the bend point and whether you have actual zeros or you are just replacing a lower-earning year," he says.
What to know before you rush out and take a job
- You don't have to do anything to get the increase. Social Security recalculates your benefits annually each November after you've filed your previous year's taxes. Thomas says there are no age limits. As long as you're able to work, you can raise your benefits.
- You won't lose benefits. Your retirement benefit is always calculated on the 35 highest years, determined after applying inflation adjustments to earlier years. Your additional year will go into the formula only if it raises your average.
- Erasing zeros always makes a difference. If you worked for fewer than 35 years, you have zeros averaged into your AIME. Working, even part time at low wages, will make some difference.
- The more modest your benefits, the larger the increase. If you are getting $1,000 a month from Social Security, working an additional year will likely make more difference than it would if you were already receiving $2,000 a month.
But don't let that discourage you. As Thomas points out, "Any increase in benefits is for the rest of your life, and that is pretty sweet."
Read about recent changes to Social Security: The devil is in the details.
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