Survey after survey confirms that many U.S. workers are behind in their retirement savings. That's not a fun place to be. Without sufficient savings, you're likely to question when you can retire and what type of lifestyle you can support after you leave the workforce.
Padding your savings is a priority in this scenario, but there's another, complementary strategy to consider. It involves increasing your Social Security income. Higher Social Security income allows you to take lower annual draws from your retirement account. And taking less from your savings every year should help you stay solvent, longer.
How Social Security works
Under current Social Security rules, you can push your benefit higher by increasing your average income. This isn't a quick fix. It's a strategy that works if you give it enough time.
Social Security calculates your benefit from your average monthly income over your 35 highest-paid years of working. Note two points about this calculation:
- If you've worked fewer than 35 years, Social Security uses zero income for the missing years.
- Prior to calculating your 35-year average, Social Security adjusts your wages for inflation. So your income from, say, 25 years ago might be roughly equivalent to today's income if your raises haven't outpaced inflation.
To check this, you'd need to divide the national average wage index for the current year by the national average wage index for a prior year. Then multiply the result by your earnings in the prior year. The answer is the current year's equivalent of that prior year's earnings. If that answer is more than what you make today, your inflation-adjusted income has gone down instead of up.
Given these two points, there are three ways to raise your income average, which, in turn, raises your Social Security benefit. You can lengthen your work history to 35 years, transition into a higher-level job, or start working part-time in your off hours.
1. Work at least 35 years
If your work history is shorter than 35 years, reaching that 35-year milestone naturally raises your average income. This is because you'll replace the zero-income years in the average income calculation with higher values.
2. Get a higher-level job
A simple merit increase in your current role may not have much impact to your retirement benefit. What you want is a pay increase large enough to outpace wage inflation. That may require a promotion.
The good news is that a promotion-related compensation boost raises your income in the current year and, hopefully, in all future years. The more years you can work at the higher pay scale, the bigger impact you'll see to your retirement benefit.
As a bonus, you can use the extra income to raise your retirement contributions.
3. Add part-time income
Sometimes, adding part-time work to your routine is easier than getting a promotion. With expertise in a professional field, for example, you might have the option to pick up some consulting or contracting jobs. Or, you could try working for a ride-sharing company, gardening, or handyman services to earn extra cash.
Whether you choose self-employment or a traditional part-time job, you'll report the extra income on your tax returns. Any self-employment income is subject to self-employment taxes.
As with getting a promotion, the earlier you implement this strategy, the greater the change you could see in your benefit.
Projecting your potential benefit increase
Social Security provides multiple tools for projecting your retirement benefit at different income levels. The most accurate is the benefit estimator within my Social Security. The estimator calculates your expected benefit using your reported income history.
The estimator also assumes that your average future annual salary will be equal to what you earned in the prior tax year. You can change this number manually to see an updated estimate. Test out different average future income numbers to see what income you'd need to produce the retirement benefit you want.
There are obvious trade-offs to extending your career, having a higher-level job, or working more hours. Projecting the potential gain to your Social Security benefit may help you decide if those trade-offs are worth it.
If the trade-offs aren't worth it, you might consider building a passive income stream to supplement Social Security and your savings distributions. Or, you could downsize now to lower your income needs later. That would also free up more cash to send to your retirement account.