Question about SS benefits

[David1961]

I have heard from a couple of co-workers that when they calculate your Social Security benefits, they take into consideration only the last 5 years of work. If that is the case, then what happens if you take an early retirement or start working part-time before you retire? I always assumed that the SS benefits are calculated using your entire salary history. Can anyone straighten me out on this? In figuring out my ER, I am assuming no SS anyway (to be conservative) but it would help to know this. Thanks.

 

[REWahoo]

From the ssa.gov website:

Q. Are my benefits figured on my last five years of earnings?
A. No. Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, we will average your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.

The actual impact to SS retirement benefits of going part-time or retiring early for most people is typically very small. The best way to determine this for yourself is to use one of the SS calculators on the ssa.gov website and run your own "what if" numbers.

 

[DallasGuy]

Just as an example, I used the SS calculator to see what the difference for me would be if I retired today at age 51 1/2 versus working until 62 and then retiring. If I retired now I would get approximately $1314/month at 62 but if I worked until 62 and then retired I would get approximately $1470/month, a difference of only $156/month. It's not enough of a difference to me to keep working until 62.

 

[youbet]

I have heard from a couple of co-workers that when they calculate your Social Security benefits, they take into consideration only the last 5 years of work. If that is the case, then what happens if you take an early retirement or start working part-time before you retire? I always assumed that the SS benefits are calculated using your entire salary history. Can anyone straighten me out on this? In figuring out my ER, I am assuming no SS anyway (to be conservative) but it would help to know this. Thanks.

David 1961.....

Like you, I love getting info the quick and simple way by listening to others who seem to have the skinny on some subject. But, in the case of SS you're making a huge mistake by not doing the research yourself so you truly understand what's going on. SS is NOT a good area to be saying "I heard from a couple of co-workers......."

The SS website is darn good considering it's a website and it's government. A couple of hours will be plenty to read the material and run some examples on one of the calculators and you'll rapidly understand the basics of SS retirement benefits. Later, you can build on that and tackle understanding when to start retirement SS benefits, disability benefits, implications of working after beginning SS, etc.

Oh yeah, as REWahoo pointed out, SS is calculated using your entire work history and is biased towards benefitting low income folks. Retiring early has surprisingly little impact on your benefits. Try the calculators and see for yourself.

 

[RetireeRobert]

I have heard from a couple of co-workers that when they calculate your Social Security benefits, they take into consideration only the last 5 years of work.

I second the advice to go straight to the source for your SS info. "I heard from a couple coworkers that..." is a lousy way to plan the rest of YOUR financial life.

35 years of highest earnings is what SS calculates on. That "last 5 years of work" bit is total garbage. Glad you came to this forum to start getting opnions on where the good info is.

 

[rs0460a]

35 years of highest earnings is what SS calculates on.

And don't forget, each year of earnings is adjusted for inflation in order to "normalize" your earnings over the 35 highest earning periods.

Other adjustments are possible extra credit for military service (depends on what year(s) you served).

While the info you receive here is probably "better than most", you're still better off refering to the SS site for the current "rules".

- Ron

 

[David1961]

Thanks for the answers and the advice. I guess I get a little lazy and just ask others instead of researching it myself. But that's not a good way, especially when it comes to ER.

 

[REWahoo]

Thanks for the answers and the advice. I guess I get a little lazy and just ask others instead of researching it myself. But that's not a good way, especially when it comes to ER.

Yep. Taking the lazy way to ER is a good way to end up working for the rest of your life...

 

[travelover]

Thanks for the answers and the advice. I guess I get a little lazy and just ask others instead of researching it myself. But that's not a good way, especially when it comes to ER.

You don't need to apologize. Some of the posters here are over 60 and grumpy. Good for you for pursuing an answer!

 

[youbet]

You don't need to apologize. Some of the posters here are over 60 and grumpy. Good for you for pursuing an answer!

Yeah......so what! Just a few months over 60 anyway..... No grumpy geezers here!

 

[REWahoo]

You don't need to apologize. Some of the posters here are over 60 and grumpy. Good for you for pursuing an answer!

Yeah, why do the research yourself when you can get the wrong answer from the guys at work or from some old grumps on an internet board...

 

[travelover]

Yeah, why do the research yourself when you can get the wrong answer from the guys at work or from some old grumps on an internet board...

I give him credit for wondering. OK, I've gotta go take a nap now. I'm feeling grumpy.

 

[ERD50]

David1961 - I'd guess that your co-workers were talking about the company pension (if you get one?) rather than SS.

Those sorts of retirement plans are often based on the last 5 or 10 years earnings, or highest of those, or some formula like that.


-ERD50

 

[RetireeRobert]

David1961 - I'd guess that your co-workers were talking about the company pension (if you get one?) rather than SS.

Those sorts of retirement plans are often based on the last 5 or 10 years earnings, or highest of those, or some formula like that.


-ERD50

Speaking of which, if you DO have a company pension plan, you ought to go to your HR department (or Plan administrator) and start getting the nitty gritty of how that pension works too: when you vest, how benefits are calculated, how benefits can change with different exit ages, if you have option to take lumpsum and roll over to IRA, what different survivorship options there are for DW (or other beneficiary), etc.

Tell them the grumpy guys from the early retirement forum sent you, and they expect you to come back with lots of answers! (I'm not a day over 62---in fact I'm several days under.)

 

[homestead]

I was surprised to learn this year that the years you worked before age 22
don't count towards your calculation.

 

[REWahoo]

I was surprised to learn this year that the years you worked before age 22
don't count towards your calculation.

Can you point to a source? I don't see anything on the ssa.gov website that would support this.

EDIT to add: My SS earnings statement includes earnings back to when I was 16.

 

[youbet]

I was surprised to learn this year that the years you worked before age 22
don't count towards your calculation.

Yeah......I've never seen that on the SS site or in any of their literature. Where did you learn that?

 

[homestead]

Having trouble finding what I read, did find this below
now I am wondering if it is really true.
I remember reading benefit was based on highest 35 years
starting at age 22.

"Although the policy model approach uses career aver-
age earnings as the measure of pre-retirement earnings,
Social Security benefits are actually based on the
worker's Average Indexed Monthly Earnings (AIME).
The AIME is determined in two steps. First, the work-
er's annual taxable earnings after age 22 (or 1950) are
updated, or indexed, to reflect the general wage level
at age 60. Earnings in years after 60 are not indexed
but instead are counted at their actual value. Second,
Social Security takes the highest 35 years of wage-
indexed earnings between ages 22 and 62 and divides
that total by the number of months in that period."

link

 

[homestead]

This page says the opposite...

2.15 Is it true you cannot accrue Social Security benefits before age 22? If so, why?

link

 

[EngineeringMyFinances]

From the page homestead linked:

2.20 Who or what group is responsible for taking away Social Security benefits from senior citizens who have to work to survive after 65 years of age? Under current law, Social Security beneficiaries who are 65-69 may earn up to $14,500 per year, after which benefits are reduced $1 for every $3 earned; this is done under the theory that retirement benefits should be paid only to persons who are retired. The earnings limit is eliminated at age 70 and over. This provision is in the Social Security Act and, in one form or other, has always been present.

While this may have been true in the past, it no longer is. This is true only for those below Normal Retirement Age (66 for those 1943 - 1954).

I highly recommend doing your research on the Social Security Administration web site. You may have to hunt through a few pages, but the information is all there.

As far as the age 22 rule, maybe it applies if you were born 1928 or earlier. If you were born later, then that summer job at McDonald's when you were 16 counts toward your SS benefit if it's one of your top 35 years of indexed earnings. See what the SSA web site says if that's you were born before 1929.

 

[homestead]

Just found this on a ssa page...
still confused

link

"As the Social Security system has matured, more years of a
worker’s earnings are used to compute retirement
For
people reaching age 62 in 1981, benefits are based on their average
earnings over their highest 25 years. Those reaching age 62 in 1991
or later will have their retirement benefits based on their highest 35
years of earnings. Thus, as the average period lengthens, more women
will have childcare years included in the period over which earnings are
averaged to compute retirement benefits.
Earnings are averaged over a number of years determined from the
years between January 1, 1951 and the year the worker reaches age 62.
If he or she reached 21 after 1950, the period for averaging begins with
the year age 22 was reached."

 

[youbet]

Why are you looking in the section on SS history? That's hundreds of pages of proposals, recommendations, etc., regarding SS made over the years.

Go look in the main area under how your SS benefits are calculated.

 

[Martha]

I agree with EngineeringMyFinances, the age 22 rule you keep running into appears to be an artifact of a change in the rules as to how your benefits are calculated and only applied to people born in certain years.

 

[homestead]

Went to the online calculator and entered all my earnings records
assumed I was retiring at 62 and 0 income from 2007 on and
got $1525.00 for a monthly benefit.

Went back into the form and deleted all my years before I was 22
and recalculated and got $1501.00 benefit.

So it is using those years in the calculation but it only adds $24 /month.

 

[youbet]

So it is using those years in the calculation but it only adds $24 /month.

That makes sense and is congruent with the trial runs I have done with the online calculator. I didn't specifically omit the years prior to the age of 22, however, so glad to hear you did and that that is cleared up.

Thanks for following up!