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Can a Year of Low Earnings Reduce My Social Security Benefit?

A reader writes in, asking:

“I’m in the not-quite-retired-but-probably-could-afford-to-if-I-wanted-to stage of my career. I am pondering many options, including cold-turkey retirement, switching to fewer days per week, or retiring but starting a new type of work that I hope would be more fun on a daily basis. One concern I have about the last two options is that they will result in one or more years of lower earnings at the end of my career, and I have heard that could reduce my social security retirement amount. Is that true?”

Short answer: no, that’s not true.

Many pensions are based on things like “average of last 5 years of earnings.” For pensions like that, yes, a year of low earnings at the end of one’s career could result in a smaller pension.

But that’s not how Social Security works. Your Social Security retirement benefit is based on your 35 highest years of earnings (after adjusting years prior to age 60 for wage inflation). If you have a new year of low earnings, worst-case scenario is that it isn’t one of your 35 highest and it therefore is simply not included in the calculation. In other words, that year of earnings wouldn’t reduce your benefit — it just wouldn’t increase it, as an additional year of high earnings might.

However, a year of low earnings could cause the benefit estimates on your Social Security statement to go down. Similarly, a year of low earnings could cause your actual benefit to be lower than the benefit estimate that you are seeing on your statement.

The key point here is that the benefit figures that appear on your statement are estimates. And those estimates include a projection about future earnings. Specifically, the estimates assume that you continue earning — at the same earnings level as your most recent earnings year for which the SSA has data — until you retire and file for benefits (the estimated figures on the statement assume that those two things will happen simultaneously*).

So:

  1. If you have a year of earnings that was lower than your prior year, once your benefit estimate reflects the new lower year of earnings (and therefore projects that lower earnings level forward) it could result in a lower estimate, and
  2. If your actual earnings turn out to be lower than the assumed/projected earnings baked into the estimated benefit figures, your actual benefit could turn out to be lower than the estimated benefit.

But again, an additional year of low earnings will not reduce your actual benefit. Worst-case scenario is that a year of low earnings will have no effect on your actual benefit (i.e., will not increase it).

*This article explains how to use the SSA’s calculators to calculate what your benefit would be if you retire at a different age than the age at which you file for benefits.

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Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
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