I am 60 years old and have spent the last 10 years earning what would be my highest wage (just at $100,000) in the industry I am employed in. I would like to scale back on the workload and step back into a position that is not so demanding. But that means I will earn less during my final work years. How do I calculate that with Social Security estimations?
My scenario: I can retire at my high earning salary in two years or go an extra five to seven years at a reduced salary. I don’t plan to apply for SS benefits until age 65 at the earliest. My husband will still be employed, so I won’t need that income immediately.
I want to know once I begin drawing, will it be less than if I just stopped at the higher salary? Since Social Security uses a combination of later year’s earnings as an average? Thank you.
— Retirement Planning
Dear Planning,
Contrary to popular belief, Social Security benefits are not calculated based on your most recent working years, but on your highest earning years. It looks at the 35 years when you earned the most, so as long as you’ve worked at least 35 years, you can retire or scale back your income anytime without hurting your benefit amount.
If you’ve worked less than 35 years, reducing your earnings now could matter. In its calculations, Social Security considers the salary for any years you’ve worked, but figures in a $0 year for any years less than 35. For example, if you worked from ages 30 to 60, that’s 30 years. The calculation would consider the money you earned in each of those 30 years, plus five years of $0, which drags down average monthly earnings. Maintaining your higher salary for the next two years would reduce the number of $0 years considered and pump up your overall average earnings. Maintaining some salary for the next five to seven years might help even more.
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Social Security’s Quick Calculator can help you estimate your potential benefits based on your earnings over the years. You can also work with a financial planner to discuss the most optimal plan for working now and in the future, and the best year to start drawing benefits.
Dana Miranda is a Certified Educator in Personal Finance® and author of YOU DON’T NEED A BUDGET. She writes Healthy Rich, a newsletter about how capitalism impacts the ways we think, teach and talk about money.
