How much you receive in Social Security retirement benefits depends on your earnings history. The formula for calculating benefits is based on your 35 highest earning years indexed for inflation.
But there's one thing retirees need to know. Those inflation adjustments stop when you turn 60. That can make working in your 60s much more valuable to someone looking to make the most of their Social Security benefits.
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Earning in today's dollars
You have the opportunity to earn in today's inflation-adjusted dollars by working in your 60s while the rest of your past earnings are no longer adjusted for inflation.
If you turn 60 in 2023, you'll likely have earnings dating back to the 1980s.
Let's say you started your career in 1986 with a salary of $25,000. Based on Social Security's wage index, those earnings will count as $84,788 in the calculation of your benefits. But that's the maximum amount they'll ever be worth.
Maybe that's equivalent to your earnings in 2022. But if you get a simple adjustment in your wages for inflation next year, you'll earn more. Meanwhile, your previous earnings won't get indexed any higher. That's especially pertinent in high-inflation environments.
As such, by working at 61, you'll increase your Social Security benefits, even without any real (inflation-adjusted) wage growth from when you were 23. Of course, most people see real wage growth over the course of their careers.
Some of your highest earning years
Your 60s may offer some of your biggest career opportunities. The typical American earns their highest salaries in their 50s, but there are still plenty of well-paid positions for those in their 60s.
The average 25- to 34-year-old earns just under $50,000 per year, according to the Bureau of Labor Statistics. Meanwhile, the average 55- to 64-year-old earns nearly $10,000 more per year. That's a 20% increase.
If you're earning 20% more than you did in your 20s and 30s and getting the benefit of inflation, you'll provide a substantial boost to your Social Securities benefits.
Let's go back to the example of someone who earned $25,000 in 1986 as a 23-year-old. By 2022, they've increased their real earnings by 20% and now bring home $101,746. If the person continues to work in their 60s, receiving an average 3% raise each year, they'll have earnings of $117,951 by age 65.
That would increase their average indexed monthly earnings by $79 by replacing their age-23 salary in their top-35 earning years. Even just an extra $79 per month in average earnings translates into more than $300 in extra Social Security payments per year at full retirement age.
More likely, the average earnings increase would be much higher as ages 61 through 64 replace other low-earning years that have stopped adjusting for inflation. If those five extra years of work translate into something like a $350 increase in total, it's nearly $1,350 in extra Social Security benefits per year. And if they delay benefits until age 70, it's more than $1,650 in extra benefits. For someone abiding by the 4% rule, that's the equivalent of an extra $41,000 in retirement savings.
Consider your options
If you've had a lucrative career and you've maxed out Social Security wages in most years, you probably won't get much more out of Social Security by working in your 60s. If, however, you've mostly been an average earner or even a slightly above-average earner, you may get a lot out of continuing to work.
You can look up your own wage indexes on the Social Security Administration's website based on the year you become eligible to collect benefits. If you're on the fence between retiring early and continuing a few more years, you may as well do a little math to see how much more you can get from Social Security by working past age 60.
