After decades of employment, the prospect of retiring and starting to receive Social Security benefits may appear appealing. For individuals aged 62 or older who have accumulated enough work credits, filing for retirement benefits is straightforward. However, taking benefits at the earliest opportunity may result in lower monthly payments than if one chose to postpone claiming. This report examines how working for an additional year beyond the minimum requirements can lead to larger Social Security payments over the course of retirement.
Eliminating Zero-Income Years from Benefits Computation
Social Security benefits are calculated using a formula that averages the highest 35 years of indexed monthly earnings, a measure termed the Average Indexed Monthly Earnings (AIME). Although benefits can be claimed with as few as 10 years of employment, the calculation includes zero-income years for any years under 35, which can reduce the overall benefit amount. For example, a worker earning the inflation-adjusted equivalent of $60,000 annually over 35 years would be eligible for a monthly retirement benefit of approximately $2,346 at full retirement age (FRA). Conversely, if that worker had only 34 years of earnings, thereby including one zero-income year, the estimated monthly benefit drops to around $2,300, a difference of $46 per month.
Working an additional year helps replace such zero-income years with actual earned income. Since the zero-income years count as zeros in the averaging formula, their elimination directly increases the AIME and thus leads to higher monthly Social Security checks for the entirety of the retiree’s life.
Increasing Earnings in Later Career Years
Many individuals experience higher wages later in their careers compared to the beginning stages. Consequently, continuing employment beyond the 35-year threshold incorporated into the Social Security earnings calculation can enhance benefits. Earnings from these later years with higher wages gradually supplant lower earnings from earlier years in the benefit formula. Such replacement raises the overall AIME figure, which directly translates into increased monthly Social Security payouts.
The Advantage of Delaying Benefits Application
Benefits increase for each month that a claim is postponed beyond the earliest eligibility age, especially up to age 70, representing the maximum benefit age for most workers with a FRA of 67. The pace of monthly benefit growth depends on the claimant’s age and full retirement age. By working an extra year, individuals may gain the financial stability necessary to defer claiming benefits. This strategy results in larger monthly payments for the remainder of their lives, as Social Security provides increased benefits for delayed retirement credits accrued between FRA and age 70.
Ultimately, the decision to extend work by an additional year before initiating Social Security benefits should account for personal circumstances and work feasibility. Nonetheless, if continued employment is possible, the financial incentives presented by eliminating zero-income years, improving the average indexed monthly earnings by including later higher-income years, and enabling delayed application provide compelling reasons for postponement. These factors combine to increase the lifetime value of Social Security benefits significantly.