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Is Working Worth the Benefit?

In meeting with someone recently, they asked a wonderful question, “Is working worth the benefit?”

The benefit they were describing was Social Security. In essence, they were questioning whether they could – or should – retire earlier than anticipated because of how that may impact their Social Security benefit in retirement.

Social Security benefits account for one third of the average retirees’ income. If working fewer years dramatically impacts Social Security benefits, pre-retirees would surely want to take that into consideration before deciding to retire early.

So let’s explore that question.

But first, a quick lesson on how Social Security determines retirement benefits. No, they don’t throw darts, but the computation can get tedious. In the interest of time and space, I’ll give you the simplified version.

The Social Security Administration tracks and records every working persons’ annual wages. When it comes time to calculate your Social Security benefit, they bring all of your wages throughout the years into current dollars. In other words, the money you made early in your career is indexed to today’s dollars to account for inflation over time.

With those indexed annual values, the Social Security Administration averages the highest 35 years. This gives them your average annual indexed wages over your working career.

From there, the Administration runs your average annual indexed wages through a rate chart to determine your final annual benefit. The rate chart is similar to how the IRS determines how much you owe in taxes. But in this case, the government is calculating how much to pay you, not charge you.

Clear as mud? Okay, let’s return to our question. Does working longer significantly impact your Social Security benefit in a big way?

For this example, assume a person earns the average U.S. household wage throughout their career, starting in 1980. That would roughly make the individual 62 years old today. And age 62 happens to be the first year possible to claim Social Security retirement benefits.

If our fictitious person decided to retire this year, at age 62, but waited to claim her Social Security benefit until 66, which would be her full retirement age, she would receive an annual benefit worth roughly $28,550.

That provides a great baseline for comparison purposes.

Carrying on with our example, what if that same individual worked until age 66 and then retired, instead of retiring early? She would have four more years of wages to count in her “highest 35 years” calculation. That helps. But by how much?

By working until her full retirement age, the annual benefit would increase to a grand total of $28,700. Those four years of work netted her a whopping $150 more per year in Social Security benefits.

So, for most people, the answer to our question is simple. No, Social Security is not a big factor in determining whether to retire early.

There are exceptions, though. If you do not have 35 years of wages – or if in certain years you received meager wages – those last few years of working could increase your benefit more substantially. Or, if you get a really significant increase in wages in the last few years before retirement, that could also change the picture.

For most, the value of working longer is not found in Social Security benefits. The real value is having more years of wages that can be saved. Things like employer health insurance matter greatly too. Not only that, working longer also means fewer years your savings must support you.

I have seen plenty of examples in which working longer makes the difference between simply getting by in retirement and feeling totally secure.

So while Social Security may not be a factor in your decision to retire early, you still must weigh your options and choose wisely.

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