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October 19, 2011


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I hadn't heard that about having a 0 average in for social security for the years not worked up to 35. I guess it makes sense if benefit is based on 35 years of working.

I am like you, I don't count on social security either. Based on my recent third quarter statements, doesn't look like I can count much on my 401k either. :)

Useful information on social security at this link:

I've heard that you are entitled to social security benifits of your spouse if and only if you have been married at least ten years. Divorcees are also entitled if the divorce occured after 10 years of marriage.

The 35 years average is correct including zeros. Just keep in mind the benefit payout is not a directly porportional relationship to your income (each additional dollar of earnings adds an incrementally lessor amount to your benefit), so missing a few years doesn't hurt as much as it would seem. (e.g. If you worked 35 years and averaged $50K your benefit would be around $1300. If you didn't work 10% of those years your income average would drop 10%, but your benefit would only drop about 6%).

If one wanted to "max out" potential earning from all sources until retiring then one wouldn't retire until eventually unable to work. An early retiree is not looking to max out earnings, they are looking to max out years of retirement on "enough" earnings.

I took early semi-retirement at age 40 because I knew if I kept working full-time, I might not make it to age 50. There are things more important than being the richest person in the graveyard.

The 35 years is correct.

Social Security payments are based on your Average Indexed Monthly Earnings (AIME)

When determining someone's AIME income is indexed for inflation. So income earning in your early years will be adjusted up based on inflation and make them a larger contribution than they might appear. However this indexing formula is put in place in the year you turn 60. That means all income you contribute prior to turning 60 is indexed for inflation when determining your AIME but all income earned after that is not. The link below shows two examples of calculating a person's AIME. You will notice in the second example that the years after age 60 the indexing in the table was 1.000 so not inflation adjustment was applied.

The fact that only 35 years count towards your benefit and that after age 60 the income is not adjusted for inflation when calculating the AIME is one reason why income earning in those years likely has very little if any affect on many peoples social security checks unless you had a number of years with very little income. If you started working at age 22 you already have 38 years under your belt by age 60 so you are already throwing 3 of them away anyway.

Based on the AIME there is a formula used to calculate your Primary Insurance Amount (PIA). This is the amount of your monthly check. This is a graduated formula that gives larger payouts for smaller contributions.

The percentages in this formula do not change but the dollar amounts are adjusted every year based on inflation. Currently the formula is the following:

90 percent of the first $767 of AIME
+ 32 percent of AIME earnings over $767 and through $4,624
+ 15 percent of AIME over $4,624

Adding those values will give you your monthly social security check.

The 15 percent "bracket" starts at about half way to the point of the maximum AIME if you had paid the maximum social security for all 35 years. So you can see based on this formula that once you have contributed about half the maximum that you could contribute to social security the amount that it is increasing your benefit is minimal.

I personally intend to leverage that fact as I am probably approaching the half way point with about 19 years of contributions, not all at the max but near the upper end. I hope to leave wage income in the next few years and transition to rental income which considered unearned and is thus not taxed for FICA. I will have made enough contributions to social security to maximize both the 90% and 32% parts of this formula even though I will not have worked for 35 years. Thus I will still have earned about 3/4 of the maximum size of a social security check that I could get if I continued contributing to social security up until I was 62.

I won't miss making that contribution one bit and it won't cost me hardly anything in lost retirement earnings either. Further more if they means test social security in the future it is likely to hit those contributing the max more so than those with more meager contributions. Most proposal for means testing talk about just reducing how much earnings they count towards your social security check rather than outright eliminating it for higher income or net worth individuals. Likely changes to means test social security will probably just make the 15% bracket an even smaller percentage or make it start even quicker while increasing the percentages of the other two brackets. Thus if you are high income and contributing in those years of 20-35, there is a good chance that eventually, most or all of those contributions will be throw away if they put in place a more aggressive means testing formula.

So in my opinion, the argument to make sure to get 35 years of contributions into social security does not hold much truth if you are contributing anywhere near the max. If you are contributing at a much lower level then it certainly is true.

If you contribute to SS for 40 years only your 35 highest years are counted. The other 5 are thrown away completely. They are literally contributions that are wasted or lost.

Secondly all earnings that are counted for SS prior to the age of 60 are adjusted for inflation when calculating your lifetime income contribution amount. Earnings after the age of 60 are not. So if you keep working into your mid to late 60's and have well over 35 years of contribution the income you contribute in those later years even if at a higher salary may be the ones that are thrown away and thus you will not increase your benefit one dollar by working more. My father is 75 and a semi-retired farmer but he still farms the land he owns. He makes enough from that to still make a sizeable contribution to social security on the order of 3-4000 per year. A decade ago that used to marginally increase his payout because he would be throwing away a smaller year and keeping a larger year. He of course was not happy with the arrangement because he contributed $4000 and got his payment increased like $4 per month. Not exactly a good deal. Now the earlier years have been adjusted for inflation and thus larger than his new contributions thus he now contributes about $4000 and gets no increase in his payments. He is even less happy with this arrangement. :)

LOL, I see some comment that I thought I had erased made it on the end of my post. Its a little misplaced and somewhat redundant in the flow but it does show an example of someone who had contributed so many years to social security that he is paying in large annual contributions and getting zero benefit for it.

On point #1, I just had a good example of that. My daughter's friend has been out of work for over a year. This month she went to a headhunter and he said that her problem, with all her experience and education, was that she was not asking for enough money. The headhunter said that if you don't recognize your worth, a company willl think twice about hiring you.

And from fighting to get a few interviews, she went to 8 in one week - 3 being companies that have been doing multiple interviews with prospective employees.

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