By Rusty Gloor, National Social Security Advisor at the AMAC Foundation, the non-profit arm of the Association of Mature American Citizens
Dear Rusty: I stopped working at age 55, well before my full retirement age of 66 years and 10 months. I had over 35 years working prior to retiring from work. I don’t intend to start collecting Social Security until my full retirement age. Will I be penalized for all those years between when I stopped working and my full retirement age? Signed: Planning Ahead
Dear Planning Ahead: Will you be “penalized?” No, because whenever you claim your Social Security benefit, it will be based upon the highest-earning 35 years over your entire lifetime (with the early years adjusted for inflation). Would your benefit be higher if you had continued to work and have high earnings longer? Probably, because earnings in the latter part of one’s career are usually considerably higher than those in the early years. But everyone’s situation is different.
Higher earnings today don’t necessarily replace those in earlier years because of the inflation adjustment. For example, someone with $50,000 in 1990 earnings would need to earn more than about $115,000 in today’s dollars to replace the earlier year. And keep in mind that your benefit computation uses only the dollars which you paid SS taxes on. So, someone earning $500,000 this year would, for benefit computation purposes, only get credit for $142,800 in earnings because the latter amount is what Social Security FICA (or Self Employment) taxes were paid on.
It is from your highest-earning 35 year history that your Average Indexed Monthly Earnings or “AIME” is determined, followed by yet another formula to convert your AIME to your “primary insurance amount” or “PIA.” Your PIA is what you are entitled to in the month you attain your full retirement age (FRA). If you claim before your full retirement age you’ll get less than your PIA, and if you claim after your FRA, you’ll get more than your Primary Insurance Amount. If you delay claiming past your full retirement age, you’ll earn delayed retirement credits (DRCs) up to age 70, at which time your benefit could be as much as 29% more than your PIA. Of course, you can also claim at any time between your FRA and age 70 to get all DRCs you’ve earned to the point you claim.
So, as you can see, the Social Security benefit you get will be determined by two main things – your 35 year lifetime earnings history, and the age at which you claim. You can’t do much now to change your 35 year earnings history (short of returning to work and having very high current earnings), but you can control when you claim. And that decision, of course, should consider your health and your life expectancy, how badly you need the money, and your marital status. Your marital status is important if your spouse can collect a spousal benefit from your record, or if you are concerned about the amount your survivor(s) will receive if you die first.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at firstname.lastname@example.org.