The Social Security Rule That Matters Most Once You're Within 5 Years of Retirement
A smart money move for seniors is claiming Social Security at the right time.Although you might have savings and other sources of income to live on once youretire, Social Security guarantees you monthly benefits for life. So the largerthose checks are individually, the fewer financial worries you might have.
You may be aware that your Social Security claiming age plays a role indetermining what monthly benefit you get. But your wage history also plays a role in determining how much Social Securityyou get each month, which is why it’s important to be mindful of one key factorwhen you’re within five years of retirement.
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Your 35 highest-paid years of earnings matter
Your Social Security benefits are based on two things: your lifetime wagehistory and your filing age. And within the context of your wage history, theSocial Security Administration (SSA) specifically takes your 35 highest-paidyears of earnings into account when calculating your monthly benefits.
If you have fewer than 35 years of earnings on record, the SSA will factor a $0into your benefits formula for each year you don’t have wages on file. A single$0 year may not have such a big impact on your monthly checks (though it maystill have some impact). But several $0 years could make a big difference in howmuch you’re paid each month during retirement.
Now, let’s say you’re nearing retirement with only a 32-year work history. Ifyou decide to end your career then, you’re looking at three $0 years for SocialSecurity purposes. If you work three more years, you’ll have wages instead ofthose three $0s. That could make a big difference.
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Working more when your earnings have peaked helps tremendously
Many people’s careers follow a certain trajectory – you earn less when you’refirst starting out, your earnings grow as your skills develop and you attainpromotions, and your earnings eventually peak at a certain level. If this is thepattern your wages have fallen into, then you should know that the five-yearperiod leading up to when you claim Social Security could be extremelyimportant.
If you’re in your early or mid-60s and are at your peak earnings, your wages inthe five-year period leading up to retirement could matter a lot. Those earningscould bring up your average wages, leading to larger monthly benefits for you.
It could pay to keep working even if you have a 35-year history
It’s true that Social Security will only count your 35 highest-paid years ofwages in its benefits formula. But if you’re nearing retirement and you seeyou’ve already worked 35 years, that doesn’t automatically mean you should stop.
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If your earnings are at their peak now and you continue to work, you can replacea few years of lower earnings with higher wages. The result? Larger monthlySocial Security checks.
For example, let’s say you began working at age 25 and are now 60. If you nevertook a break, it means you may have 35 years of earnings on record already.
But chances are, the paycheck you earned at 25 pales in comparison to whatyou’re earning now. If you continue working, you may be able to replace a fewyears of entry-level wages with higher wages, resulting in larger monthly SocialSecurity benefits.
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Keeping tabs on your earnings record is also key
A lot of people assume that the SSA has all of the information it needs tocalculate their monthly benefits. But it’s not a given that the SSA’s data isaccurate. If the SSA has missing, incomplete, or incorrect information for youon file, that could result in smaller monthly checks.
For example, let’s say you changed jobs in 2022 and worked for one employer forhalf the year. If only your second employer reported your wages, you could belooking at missing wages that result in less Social Security for you.
That’s why it’s important to check your wage history and make sure the SSA hasit right. The easiest way to do so is to create an account on SSA.gov and check your earnings statements.
Those statements should have a summary of your wages so you can see if anythinglooks off. Your earnings statements should also have an estimate of your monthlySocial Security benefits at different filing ages.
Bottom line
A lot of people’s retirementplans hinge on getting a decent monthly check from Social Security. And youshould understand the role your earnings history has in Social Security’sbenefits formula.
It’s more than possible for two people claiming Social Security at the exactsame time to have very different monthly benefits if one has a few years ofhigher earnings on record while the other doesn’t. So if you’re nearingretirement and earning a nice salary, it could pay to stick out your job a fewmore years. Not only might this result in larger Social Security checks forlife, but it could also give you a chance to grow your savings for even moreretirement income.
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