Cut Social Security's Estimate If You Stopped Working Early
Cut Social Security's Estimate If You Stopped Working Early
By KELLY GREENE
August 19, 2006; Page B4
I no longer work, which means I'm not likely to make any Social Security payments for several years before I intend to file for Social Security benefits. What kind of hit will I take -- if any -- because of that gap in contributions?
Here are the details: I started contributing to Social Security when I went to work in 1961. For at least 10 years prior to 2003, when my wife and I owned our own business, we were making maximum payments into Social Security. We sold the business in late 2003; starting in 2004, we have made no contributions to Social Security. I'm now 61. The latest Social Security statement I have, dated March 21, 2006, states that "if you continue working until your full retirement age (66 years), your payment would be X." But I am not now working, and I probably will not work again prior to applying for Social Security when I am 66 or 70.
So what monthly benefit will I see? Will I get the amount they currently are showing for me, or will it be reduced since I will not have paid anything in for at least eight years? And how much of a reduction will that be?
If I will be penalized to such a degree for the eight-year-plus gap, should I sign up for Social Security when I turn 62? Maybe I will be ahead of the game taking the lower, earlier payment of $1,360 a month, compared with $1,803 at age 66 or $2,380 at age 70.
-- Mike Ostanik
San Diego
* * *
Stopping work before you start collecting Social Security won't reduce the benefit that you accrued before retiring. But it will produce a smaller benefit than you might be expecting based on the estimated-benefits statement you receive from the Social Security Administration each year (in your case, last March). Those projections assume that you continue working to the retirement ages listed (62, 66 and 70) at your current pay.
Social Security benefits are based on earnings over your career, with pay from past years indexed to reflect wage inflation over time. For most people, the 35 years with your highest indexed wages go into the calculation. Since you have more than 40 years of earnings, your lowest-earning years would be dropped. (If you had worked fewer than 35 years, one or more of the figures used in the calculation would be a zero.)
To determine future earnings, Social Security looks at your last two years of pay. But if your statement is prepared in the first six to nine months of the year, as yours was, and your earnings for the previous year aren't on record yet, Social Security uses your earnings from the year before as your earnings for last year, this year and future years. Your statement shows the years of earnings that were included, notes Social Security spokeswoman Linda Bravo. So, if you see no earnings listed on your statement for 2004 and 2005, the estimate should be on track.
Still, you may want a more precise prediction of future payments based on your recent past. To get one, you can enter the wage history from your latest Social Security statement, along with your "zero" wages in recent and future years, into one of the calculators at 1. You also can request an updated statement from Social Security by filling out a form on the Web site.
As for starting your benefits at age 62: Since you worked for so many years, there's no penalty for waiting until you're 66 or 70 to start collecting, and good health normally argues for doing so. That said, there are other factors that only you can weigh, including whether you have enough other income to wait.
Some online tools can help you decide whether to start your benefits at age 62 or wait until your full retirement age. At 2, click on "Free Programs," then scroll down to the bottom of the page for a program to help you decide whether to start Social Security at age 62, 66 or 70. At , click on "Calculate your benefits," then scroll down to "More charts & calculators" to get to the "Retirement Age Calculator." That tool will tell you your "break even" age at which the higher payments you would get for waiting to collect until your full retirement age would start to exceed what you would collect for taking the benefit early.
One thing to keep in mind: If your Social Security benefits are larger than your spouse's, don't forget to take his or her life expectancy into account, as well as your own, in your decision-making.
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