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Understanding Social Security: What earnings are used to calculate my Social Security benefit?

​I’ve been receiving lots of questions lately about how Social Security benefits are calculated. It’s a great idea to have a full understanding of the factors involved to do the calculation, even if you don’t actually do the math. Understanding the components of the overall equation may help you to identify ways to impact your benefit in a positive manner.

Recently a reader sent in the following question:

If my husband retires early at 62 and suspends his Social Security until his full retirement age, will his monthly benefit payments be determined by his last 35 years of working, or will it go back 35 years including the four years with no income which would make his benefits less?

Let’s start this response with a clarification: I’ll make the assumption that the reference to “suspends his Social Security” is actually indicating that he is delaying his application for Social Security benefits until his Full Retirement Age (FRA). This isn’t much of a stretch, since technically Social Security retirement benefits cannot be suspended until after FRA. (Suspending benefits is a technical term for Social Security benefits, it means that you’ve applied for benefits but have voluntarily suspended receiving them. This is much different from delaying application for benefits.)

The reader seems to have a misunderstanding of the use of 35 years’ worth of earnings in calculating the Social Security benefit. It’s not the most recent 35 years’ worth of earnings, it’s the highest 35 years.

Social Security benefits are calculated on your highest 35 years of indexed earnings. The list of possible earnings includes every year from your age 22 throughout your entire life. Since the reader’s husband has stopped working altogether, with no additional earned income subject to Social Security taxation, his highest 35 years are set. There will be no changes to the calculated Average Indexed Monthly Earnings (AIME) for his Social Security record.

Read: Our retirement budget is $38,000 a year so we can’t afford to stay in California—where should we move?

In a recent column we discussed how working later in life (after FRA in the case in question) would impact someone who had already begun receiving Social Security benefits. In that case, there was the possibility that the later earnings could possibly increase the Social Security benefit, although likely minimally at best.

Read more Understanding Social Security columns

But in this letter writer’s scenario, there is another twist to the outcome.

If they’re relying on Social Security’s estimate of potential benefits, there is an assumption within the estimate that the individual in question would continue earning at the same level until Full Retirement Age. So if (as is often the case) these later years between age 62 and 67 were assumed by Social Security’s estimate to be among the top 35 earnings years, then the actual resulting benefit might be a bit lower.

Within Social Security’s website, on your my Social Security account, you have the option of modeling just such an outcome. You can indicate that you will no longer be earning after a particular age, and the calculator will project the likely Social Security benefit that you’ll receive as a result. ​

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