The single most effective way to maintain your standard of living in retirement is — ta-da! — not to retire. Or at least, not to retire as soon as you planned. A 2018 study called “The Power of Working Longer,” for instance, found that hanging on just two months longer improves your standard of living more than saving an extra 1 percent of your wages for the last 10 years of your career.
There are several reasons this might be so. If you’re still working, you don’t have to draw on your savings to cover expenses. You can use part of your earnings to add to your savings. And between the ages of 62 and 70, the longer you delay taking Social Security, the greater your monthly benefit. From full retirement age until 70, for example, your benefit grows 8 percentage points for each year you put off claiming.
But few people understand another factor that can improve their finances: how an additional year of work can raise a key number that Social Security uses to set their benefits.
To see how those additional wages help, you need to know how Social Security calculates your benefit. It uses an average of your highest 35 years of earnings covered by Social Security (they need not be consecutive years), starting from age 16. An inflation adjustment is applied to the wages you earned up to age 60 to bring them in line with your current purchasing power. If you put in more than 35 years, your lowest-earning years are dropped, pulling your average earnings up. If you put in fewer than 35 years, you get a zero for each missing year, which pulls your average down. Your 35-year average is then run through a complicated formula to produce your “primary insurance amount.” That number is the starting point for all your benefits, plus spousal and survivors benefits, based on your record. It’s also the number from which your benefits are reduced, if you have a government pension and are subject to the Windfall Elimination Provision or Government Pension Offset.
When you’re working, each year of higher earnings replaces one of your lower-earning years, so your average earnings rise. People who aren’t working can eliminate zeros on their record by getting a job. (To see your year-by-year earnings record, register for a “my Social Security” account at ssa.gov.)
Social Security reviews workers’ records every year. If last year’s earnings knocked out a lower earnings year, your benefit will be recalculated. If you’re currently receiving benefits, the higher payment will show up in next year’s checks.
Adding to a work record can be especially valuable for people who spent part of their lives out of the workforce — for example, women caring for children, laid-off workers who couldn’t find new jobs right away and people who got a late start. This strategy also works wonders for those who held low-wage jobs when they were younger but are making much more money now.
What if your current wage is less than you used to get? No matter. Social Security will still compute your benefit based on your highest 35 years. You may not love working longer, but financially it’s all balloons.