If you haven’t read Part One, “This is How Social Security Benefits Calculated”, be sure to read that first!
You just learned that Social Security uses your highest 35 wage-earning years to calculate the amount of your benefit. It also uses a weight factor to greatly increase your earnings from 35, 30, 25 and 20 years ago. In fact, it increases all of your annual earnings for all of your ages before your 60th birthday. If you continue to work at age 60 and beyond, Social Security does not increase those annual earnings. It uses your actual earnings in its calculation to determine the size of your benefit.
A question I have been asked many times over the last 12 years is:
“If I retire and delay claiming my benefits for long after I retire, will my benefit decrease?”
People ask me this because of a sentence they read on their Social Security benefit statement. On the first page of their statement, in the paragraph “Retirement Benefits”, the last sentence says:
“These personalized estimates are based on your earnings to date, and assume you continue to earn money per year until you start your benefits.”
This means that the benefit amounts shown on your Social Security statement assume that you work up to those ages. It also assumes you make the same amount of income every year since then.
If you retire at 60, but don’t want to claim your benefits until 67, wouldn’t that decrease your benefit? Because you did not work up to age 67?
Well, the age 67 benefit amount that appears on your statement assumes you continued to work from 60 until 67. It also assumes that over that seven-year period, you will make the same amount of money every year.
Some may think that if you stop working at 60 and plan on claiming at 67, because you have $0 earnings during that time, your age 67 benefit amount would be decreased.
That would be a logical assumption to make, but that is not always the case.
If you retire at age 60 and already have 35 years of work history, your age 67 benefit may incur a very small decrease, if any at all.
What if I have less than 35 years of work history?
Now, the story is different if you have less than 35 years of work history. Some people, especially women, leave the work force for extended periods of time to raise children. That being the case, at age 60 they may only have 25 years of work history. Social Security still uses 35 years of work history to calculate your benefit. And if you only have 25 years of earnings, they will use those 25 years – and include 10 years of $0.
So, if you retire at age 60 with only 25 years of work history, and plan to claim at age 67, your age 67 benefit amount assumes that you will continue to work up until that age. It will replace seven of those $0 earning years with actual earnings. But if you retire at age 60 and don’t replace seven of those $0 earning years with actual earnings, the benefit amount you will receive will incur a more significant decrease.
In summary, if you have 35 years of earnings history, even if you don’t work up until the age you claim your benefit, chances are your actual benefit will incur a very small decrease if any at all. But if you don’t have 35 years of earnings history when you retire and want to claim your benefit a number of years after you retire, your actual benefit when you claim it will incur a more significant decrease.