Social Security: How Much Can Working an Extra Year Really Boost Your Benefits?

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If you want your Social Security benefits to be as big as they can possibly be, there are two obvious things you can do while you're still working: Wait longer to file for your benefits, and make sure that your earnings history includes as many high-earning years as possible. But many people wonder how much those efforts can really help you.

Below, we'll take a closer look at what working just a single additional year can mean for your Social Security. By separating the impact of these two factors, you can see whether either or both makes sense for your situation.

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Lengthening your work history

One key way to boost your potential Social Security benefits is to make sure you maximize your earnings history. The Social Security Administration takes into account the 35 top salaries in your career after adjusting for inflation to calculate what it calls average indexed monthly earnings. That number then goes into a benefit calculation formula that produces what your retirement benefit would be if you retired at full retirement age.

If you haven't yet worked for 35 years, then the SSA calculates your average earnings by using zeros in the years in which you didn't work. The less you work, the more zeros you'll have, and so the lower your average indexed monthly earnings will be.

Using simple math, you'd think that if you had worked 33 years and chose to work one more year, then you'd boost your benefits by about 1/33, or 3%. But because of the progressive nature of the benefit calculation formula, you usually get less of a boost in the formula.

For example, say you had earned the inflation-adjusted equivalent of $35,000 per year for a 33-year career and could earn $35,000 in a 34th year if you chose to keep working. That would boost your average annual earnings from $33,000 to $34,000, filling in one of the zeros. When you work through the numbers, your full-retirement age benefit goes up from $1,399 to $1,426 per month, or just less than 2%.

Getting bigger payments later

The other thing that working an extra year can do is allow you to put off claiming Social Security for another year, and that's where you can see a much larger impact to your monthly check. Depending on how old you are when you consider working an extra year, putting off taking your Social Security recipients can yield you anywhere from 6% to 11% more in your monthly payments once you do decide to claim.

As a simple example, say you're 65 now and considering whether to work another year. Your full retirement age is 66, so if you stay working another year, you'll get your full benefit. But if you retired now at age 65, you wouldn't get your full-retirement benefit. Instead, you'd get about an 8% smaller monthly payout to reflect the fact that you claimed a year early. Using the aforementioned numbers, that $1,399 full-retirement amount would go down to $1,282, whereas you'd get to keep the full $1,426 if you worked longer and waited until full retirement age to claim your benefits. That's a total boost of 11% to reward you for waiting.

Keep in mind that because you wait to get payments in the second scenario, you'll get fewer of them during your lifetime. That's reflected in the larger monthly amount. Yet you earn enough in your job that you don't need your benefits, putting them off a year can give you additional monthly payouts for the rest of your life. That helps to ensure your financial security no matter how old you get.

Make the right decision for you

Delaying retirement for a year isn't always an appetizing decision to consider. But financially, it can make a lot of sense. By knowing how to work through the numbers, you can make a smarter decision that takes all your personal considerations into account.

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