The amount you receive in Social Security retirement benefits depends on your earning history. The formula for calculating benefits is based on the highest 35 years of earnings indexed for inflation.
But there is one thing retirees need to know. These inflation adjustments stop when you turn 60. This can make work in your 60s much more valuable to someone looking to make the most of their Social Security benefits.
Earning in dollars today
You have the opportunity to earn in today’s inflation-adjusted dollars by working at 60 while the rest of your past earnings are no longer adjusted for inflation.
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If you turn 60 in 2023, you will likely have earnings that date back to the 1980s.
Let’s say you started your career in 1986 with a salary of $ 25,000. Based on the Social Security salary index, those earnings will count as $ 84,788 in your benefit calculation. But that’s the maximum amount they will ever be worth.
Maybe it’s equivalent to your earnings in 2022. But if you get a simple wage adjustment for inflation next year, you’ll earn more. In the meantime, your previous earnings will not be indexed higher. This is particularly relevant in high-inflation environments.
As such, working at age 61 will increase your social security benefits, even without any real (inflation-adjusted) wage growth since you were 23. Of course, most people see real wage growth over the course of their careers.
Some of your highest earning years
Your 60s may offer some of your greatest career opportunities. The typical American earns his highest salaries at age 50, but there are still plenty of well-paid positions for those in their 60s.
The average aged 25 to 34 earns just under $ 50,000 annually, according to the Bureau of Labor Statistics. Meanwhile, the average aged 55 to 64 earns nearly $ 10,000 more per year. This is a 20% increase.
If you earn 20% more than in your 20s and 30s and get the benefit of inflation, you will be providing a substantial boost to your Social Securities benefits.
Let’s go back to the example of someone who made $ 25,000 in 1986 at age 23. By 2022, they have increased their real earnings by 20% and are now taking home $ 101,746. If the person continues to work in his 60s, receiving an average increase of 3% each year, he will be earning $ 117,951 by age 65.
This would increase their indexed average monthly earnings by $ 79 by replacing their 23-year salary in the first 35 years of earning. Even just an extra $ 79 per month in average earnings translates into more than $ 300 in extra Social Security payments per year at full retirement age.
More likely, the rise in average earnings would be much higher as ages 61-64 will replace other low-income years that have stopped adjusting to inflation. If those extra five years of work translate into something like a $ 350 increase in total, that’s nearly $ 1,350 in extra social security benefits per year. And if they delay the benefits until the age of 70, that’s more than $ 1,650 in extra benefits. For someone who meets the 4% rule, that’s the equivalent of an extra $ 41,000 in retirement savings.
Consider your options
If you’ve had a profitable career and hit Social Security top salaries for most years, you probably won’t get much more out of Social Security by working at 60. If, however, you have mostly been on average or even slightly above average income, you could get a lot from continuing to work.
You can search your wage ratios on the Social Security Administration website based on the year in which you become eligible to collect benefits. If you’re on the fence between early retirement and continuing for a few more years, you might as well do some math to see how much you can get from Social Security by working over 60.
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