Can You Collect Social Security if You Have Never Worked
Executive Summary
The conventional view of delaying Social Security is that doing and then is an opportunity to earn delayed retirement credits, an 8%/year increase in benefits that can be highly appealing in today'south low-yield environment.
However, the reality is that delaying Social Security benefits doesn't just increment benefits past earning delayed retirement credits. Additional years of working while collecting Social Security benefits tin can also increase the worker's Boilerplate Indexed Monthly Earnings used to calculate those Social Security benefits in the first identify, just as catastrophe piece of work early tin can reduce AIME below what is projected every bit benefits on the Social Security statement.
And depending on how much boosted income will be earned – and how depression his/her historical earnings really are – the reality is that continuing to work while getting Social Security benefits can produce a material increase in future payments for some workers, simply considering of how benefits are recalculated. In other words, for those by total retirement age (and no longer subject to the Earnings Test), it's possible to be receiving Social Security benefits while working andhave those years added to the Social Security work history to generate higher future benefits as well!
In the end, working while on Social Security won't always produce a pregnant increase in Social Security benefits. For those whose prior working years produced more income – at least on an inflation-adjusted footing – information technology's possible that continuing to work will generate no additional benefits at all. Nonetheless, for those who oasis't fully capped out Social Security benefits based on 35 years of maximal earnings already, it is possible to be working and getting Social Security benefits at the same fourth dimension, and accept that piece of work increase the benefits (at least later reaching full retirement historic period). And the potential for a benefits increase tin can be fabric in some cases, and thus should definitely exist considered in the timing and impact of when to stop working!
Similar to a pension, Social Security provides a stream of retirement income that continues every bit long as the recipient is alive (and adjusts for inflation forth the way). And as well like a pension, Social Security calculates its benefits past applying an "income replacement" formula, based on the earnings of the individual during his/her working years.
The departure, however, is that while a pension might simply be calculated based on an individual's concluding-3 or last-5 years of earnings, Social Security is really paid out based on an average of 35 years of lifetime earnings. And it doesn't take to exist a sequent 35 years or the concluding 35 years; Social Security uses whatever the highest 35 years were over the worker's unabridged career.
Calculating Boilerplate Indexed Monthly Earnings (AIME)
The caveat to computing an average of a worker'south highest 35 years of historical earnings is that in the distant past, earnings were typically lower – not only because the worker might have been earlier in his/her career, simply merely because aggrandizement lifts boilerplate wages over time (which ways older more distant wages were lower in role simply considering the inflation hadn't happened all the same!). For example, the nautical chart below is an instance of one worker'southward hypothetical historical earnings, with a loftier point in the early on years (earlier a career modify) but in general a boring upwardly trend to earnings over time.
Accordingly, when Social Security determines the 35-yr average of earnings, information technology first inflation-adjusts those earnings into electric current dollars using the National Boilerplate Wage Alphabetize. Technically, this is washed by inflation-indexing all historical earnings into a base year that was 2 years before the individual turned 62 and get-go became eligible for benefits. Thus, a 62-year-old in 2022 volition have historical earnings inflation-adjusted to the 2022 wage alphabetize; in general, Social Security benefits are indexed to wage levels 2 years before condign eligible at historic period 62, which means indexed to the individual'southward age sixty. This ensures that benefits based on historical average wage adding isn't indirectly reduced simply due to the fact that wage inflation hadn't all the same occurred in the by.
Once aggrandizement-adapted earnings have been calculated throughout all the working years, it'southward possible to determine which were the highest 35 years of earnings that volition be included in the Social Security benefits calculation (while the remaining "lower income" years are thrown out, equally shown below).
In turn, in one case the highest 35 (inflation-adjusted) years of earnings accept been adamant, an average of those years can exist taken. In our case above, this would equate to about $72,000/year.
Notably, since Social Security benefits are ultimately paid on a monthly basis, they are also calculated on a monthly basis. Accordingly, the individual'southward Boilerplate Indexed Monthly Earnings (or AIME for short) would be $72,000/yr divided by 12 months/year = $6,000/month. Alternatively, this only means the AIME is calculated by adding up the top 35 years of Social Security piece of work history, and dividing by 35 years x 12 months/year = 420 months to determine the AIME, which is then used to summate the actual Social Security benefit.
While the AIME determines the amount of boilerplate lifetime earnings that will be used to calculate a Social Security do good, the actual benefit calculation withal requires applying the income replacement factors.
With pensions, information technology was/is typical to use a single replacement percentage tied to years of piece of work. For example, a worker'south alimony income might exist 2% of last wages for each year worked, which means someone with 35 years of working history will receive a 35 years x two%/year = seventy% replacement rate. With Social Security, nevertheless, at that place are 3 replacement charge per unit tiers, and they're based non on the number of years worked, merely on the worker's average earnings in the first place (as calculated by AIME).
Specifically, Social Security is calculated past replacing ninety% of the first $856/month (in 2016) of AIME, plus 32% of the next $iv,301/month of AIME (upwards to $5,157 of full AIME), plus 15% of any remaining income higher up $5,157/month of AIME. The last 15% tier applies up to the maximum corporeality of earnings that can ever be considered for Social Security, which in 2022 is $nine,875/month (equal to the maximum Social Security wage base of operations of $118,500/yr – thus the only earnings included in the Social Security benefits formula are the earnings subject to Social Security taxation).
The benefit calculated under this income replacement formula is called the Primary Insurance Amount (or "PIA" for short), and represents the do good the retiree would get at full retirement age. (Starting benefits early on entails a reduction, and postponing them later tin nonetheless earn an appealing delayed retirement credit.) Because the Social Security income replacement formula has multiple tiers, the net effect is that as income (AIME) increases, the actual Social Security benefit PIA) increases more slowly... which in turn means Social Security finer replaces a higher percentage of income for lower-income workers, and less for higher-income workers.
Case i. If the lifetime inflation-adapted average earnings of $72,000/year (or $6,000/month) charts shown earlier belonged to Daphne, her benefits would be 90% x $856/calendar month plus 32% x $iv,301/month, plus 15% of the remaining $843/calendar month, for a Chief Insurance Amount of $2,210.47/month. If Daphne begins her benefits early (as early as 62) the $2,210.47/month will be reduced, and if she delays (as tardily as age seventy) they will be increased. This Social Security benefit replaces 36.viii% of Daphne'southward career earnings.
Example 2. On the other mitt, assume Jeremy has a lifetime inflation-adjusted income (AIME) of only $24,000/year (or $two,000/month). Appropriately, Jeremy's benefits would be xc% x $856/month plus 32% x the remaining $ane,144/month, for a PIA of $1,136.48. Over again if Jeremy starts early the benefits will be reduced, and if he delays they will increment. Nonetheless, Jeremy's overall benefits are 56.eight% of his lifetime income – a higher replacement rate at lower income levels, thanks to the graduated tiers of the Social Security income replacement formula.
For someone who earns the maximum income eligible for Social Security throughout their working career, the maximum Social Security benefit is $2,639/calendar month in 2016. (Notably, this is slightly smaller than just applying the Social Security income replacement formulas to a maximum income of $ix,875/month, due to the fact that the inflation indexing effectively only applies upwardly to historic period 60, and from that bespeak forrad benefits are simply calculated based on bodily earnings increases for aggrandizement.)
So given these dynamics for calculating Social Security benefits, what are the consequences of someone standing to piece of work and adding in more years of income – either leading up to becoming eligible for retirement benefits, or even in their 60s and beyond as they are already eligible for benefits?
As noted earlier, for Social Security the income replacement tiers are always the same percentages with the same thresholds, regardless of how long someone worked (and unlike a alimony where the replacement rate is oft higher as the number of years-worked accrues). Thus, regardless of the number of years worked, the formula to catechumen the AIME into PIA will e'er be the same, fifty-fifty with additional working years.
All the same, what does change with additional working years is the calculation of the AIME itself. Since the AIME is calculated based on the highest 35 years of earnings – and they tin can even be not-consecutive years – then additional working years that add to the highest-35, and knock off a prior "lower income" yr, can increase the AIME calculation, and therefore the amount of Social Security benefits.
Example 3. Continuing the earlier case #1 with Daphne, assume that Daphne gets a loftier-income consulting job tardily in her career, which pays her enough to attain the Social Security wage base limit. Earning the maximum $118,500 wage base for this year will replace her prior lowest inflation-adjusted income twelvemonth of $55,500. The additional $63,000 of higher earnings will in plough increase the 420-calendar month AIME by $63,000 / 420 = $150, and given the fifteen% replacement tier will in turn increase Daphne'southward PIA past $22.50. The end result: by calculation in a year of $118,500 income to replace the prior $0 year, Daphne's benefit increases by $22.fifty/month, a mere 1.02% increase in Social Security retirement benefits!
As this example highlights, the primal commuter of whether it's worthwhile to proceed working for higher Social Security benefits depends on how much the private expects to earn in the coming year, and what his/her lowest inflation-adapted income year was in the past. Every bit it is the difference between the two that drives the outcome. In addition, what PIA income replacement tier the worker is in also has a dramatic impact on the value of additional years of earnings, every bit revealed in the example beneath.
Example 4. Continuing the before example #ii, Jeremy wants to understand the affect of adding in a year of loftier earnings to his $24,000/yr historical earnings. Following the approach higher up, Jeremy first determines which Social Security curve bespeak would employ (with $24,000/yr of historical earnings, or an AIME of $2,000/month, he's eligible for the 32% charge per unit). Adjacent, Jeremy finds which of his loftier-35-years of aggrandizement-adapted earnings is the everyman (nosotros'll presume it's $24,000 and that he had flat inflation-adjusted income throughout life). If Jeremy can earn the Social Security wage base maximum of $118,500, it volition exist an increase in earnings of $94,500 over his everyman income year, which ways his benefits will be increased past $94,500 / 420 x 32% = $72/month! Given that his PIA was originally $1,136.48/month, this is a whopping 6.iii% increase in lifetime benefits by adding in i high-income year!
Of grade, the caveat is that determining whether an upcoming year's worth of earnings may be college than historical inflation-adjusted earnings requires first determining what those historical earnings were on an inflation-adjusted basis. This can be estimated by offset obtaining the individual's Social Security work history, which tin can be found by logging into the individual's "My Social Security" online account, or drawn straight from his/her Social Security statement. One time those historical earnings are plant, they can exist adapted using the National Wage Index adjustment factors (which can be requested straight from the Social Security Assistants website), to make up one's mind what the inflation-adjusted historical earnings amounts really were.
Obtaining the list of year-by-yr historical earnings from the Social Security work history record is ultimately necessary for ii reasons. First, information technology's necessary to determine which of the 3 "bend points" – the Social Security income replacement rates – will use, as there's a big divergence in benefit betwixt the 90%, 32%, and xv% levels! 2d, having historical aggrandizement-adjusted earnings makes it possible to compare the upcoming twelvemonth's earnings to the lowest historical inflation-adapted twelvemonth, to determine the income difference and prospective increase in AIME.
In fact, once the residual has been determined, the Social Security benefit increase for working another year is just the difference in earnings between the new year and the lowest historical year, divided by 420 (the number of months in the 35-twelvemonth average for AIME), and multiplied by the 90%, 32%, or 15% replacement rate!
In the terminate, whether or how beneficial it is to continue to work while on Social Security in social club to generate higher Social Security benefits in the future depends heavily on two factors: what income replacement tier (90%, 32%, or xv%) the Social Security recipient will be in (based on average historical earnings from the Social Security work history); and what the existing earnings history already was (because the increase in benefits is based only on the difference between the new year of earnings and the prior everyman year that is removed from the equation). Similar to the consequences of retiring early (and not continuing to piece of work up to total retirement historic period in the first place), the consequences vary depending on where the individual is in the AIME calculation.
How Will Piece of work AffectYourBenefits?
The lower the historical inflation-adapted income, the more meaning the value of standing to work, both considering the income replacement tier may be more favorable, and because there will typically be lower income years to supplant. In the logical extreme, where a worker doesn't even have 35 years of historical earnings, additional working years will replace a $0 yr in the AIME equation with the new year'south worth of earnings, giving the full benefit of the earnings at the current income replacement tier to exist added into Social Security benefits! (And of course, if the worker didn't even have the requisite xl quarters of eligible work to get a Social Security benefit, continued work tin be the difference betwixt getting some benefit or zippo at all!)
On the other paw, if the historical earnings are already high enough that adding some other income yr doesn't replace whatever of the prior years, the impact of having another working year could be precisely $0 on future Social Security benefits! Or if historical AIME was already loftier, calculation in a higher income year (e.yard., $100,000/year of earnings) could have a very modest effect if the prior everyman year was already $80,000 (which ways the income increase is only $20,000, and once dividing by 420 and multiplying by the lowest 15% replacement tier, is a mere $7/calendar month benefits increase!).
It's as well worth noting that since continuing to piece of work increases the worker's overall PIA, it increases not only his/her own benefit, only whatever other benefits paid based on that earnings record – which ways continued work can increase the retirement benefit, and a spousal benefit, dependent benefit, or a future survivor do good as well.
The simply important caveat to the strategy of receiving Social Security benefits and working at the same time is the Social Security Earnings Exam - where ongoing earned income (i.eastward., wages from a chore or self-employment income) can partially or fully reduce retirement benefitsif they are taken early.And so you cannot retire at 62 and still work, or earned income in a higher place the Earnings Test threshold will reduce the retirement benefits. The strategy of working while getting Social Security benefits is just feasiblesubsequentlyreaching full retirement historic period (currently age 66). On the other hand, beyond that point, it actually is possible for each subsequent yr of work in someone's late 60s or even 70s and across, to be receiving Social Security benefits while working and take those benefits recalculated for the hereafter based on another yr of piece of work (if the boosted work year really does increase AIME)!
The bottom line, though, is only to recognize that information technology's possible to be receiving Social Security benefits and piece of work, and in fact standing to work can continue to increase hereafter Social Security benefits. The actual impact, though, is heavily dependent on simply how loftier the historical aggrandizement-adapted earnings have been – and whether there's a low year amongst the top-35 prior years that could exist "upgraded" for a college benefit. In improver, the relative benefit of continuing to work is heavily dependent on which income replacement rate the worker is eligible for – equally at the upper end of the income scale the additional benefits are modest, but at the lower end, the formulas can provide a tremendous boost for continuing to piece of work just a few more years!
So what do you think? Have you ever counseled a prospective retiree to go on working after 66 non just to filibuster Social Security benefits, but to increase their earnings in order to be eligible for a higher calculated benefit? Would you consider the strategy in the future? Delight share your thoughts in the comments below!
Source: https://www.kitces.com/blog/social-security-and-working-how-adding-to-social-security-work-history-can-increase-retirement-benefit/
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