Ask Larry: Can ​My​ Extra Social Security Benefits​ From Working​ Exceed ​My​ Extra Taxes?

Social Security may be one of your largest assets. What and when you collect will make a huge difference to your lifetime benefits.

Today’s column examines examines a hypothetical case when a low earner can significantly increase their benefits – well exceeding the extra taxes – by working for just a few more years.

You can submit a question by clicking on the link on our homepage at Maximize My Social Security. Questions submitted to Ask Larry are answered by Social Security experts.

In helping people figure out how to maximize their lifetime Social Security benefits, I come across all kinds of folks with all kinds of earnings histories. I’m going to make up a case that’s not far removed from certain cases I’ve encountered that involve people with very short earnings histories who earned relatively little when they were working.

My hypothetical case involves Sandy, who is a very nice, 56 year-old lady. Sandy’s had a tough time with relationships. Her first marriage to Peter ​the Difficult (that’s what she calls him) ​ended in divorce after nine years. She didn’t realize she needed to stay married for 10 years to collect divorced spousal and divorced widow benefits. But she couldn’t wait to get Peter ​the Jerk (his AKA) ​out of her life, not just physically, but also legally.​ The two ​ had a child named Sam, when Sandy was in her late twenties. When Sam arrived, Sandy stopped working at her minimum wage job. After Peter ​the Difficult Jerk (his final appellation) ​left, she went back to work, but again at a very low salary.

Eight years later Sandy met George​ the Savior​, a ​fun-loving, caring​, high-earning guy who wanted to marry her. George ​the Savior ​had enough money so that Sandy could stop working. But Sandy was too gun shy to remarry. She wanted to keep her life uncomplicated and things were going just fine until this year. Well, actually, until last month. That’s when ​Saint ​George up and had a heart attack and, sadly, died.

George left Sandy his mortgage-free house and some​, but not a huge amount of​ money in his will​ ― just enough so that Sandy won’t starve even if she doesn’t go back to work. And that​ idea ​​frightens her. It’s been forever since she was in the workforce. But Sandy just got an offer from George’s sister to work full time in her ​coffee ​shop. It’s a minimum-wage job paying $20,000 a year. Sandy’s trying to figure out if it’s worth standing on her feet five days a week given the low ​salary​ and all the taxes she’ll have to pay. Federal income taxes would total $1,000, payroll taxes, $1,200 (that’s the employee share), and state income taxes, ​another $1,​0​00. That’s an overall tax rate of 16 percent. It’s not sky high, but, gee, working 40 hours a week, week in and week out for just $16,800 a year and all this with a bad back​ (​which I forgot to mention​)​.

Sandy’s right at the margin. But then she runs into me and I run the numbers (using my ​company’s software). “Sandy,” I say, “If you work for three years, and take your Social Security at 62, like so many people do, your lifetime benefits ​will be over $26,000 higher. That’s going to more than cover all the ​extra taxes you will pay for the next three years.” Furthermore, if you can squeeze by and wait till 70 to collect, the extra three years of work will mean over $34,000 more in lifetime benefits. And Sandy, these are present value amounts. This is equivalent to being handed an extra either $26,000 or $34,000 right now!”

​Moreover, working three years and waiting till 70 to collect will line you pockets with over $65,000 more, in right-today’s present value, compared to not working and taking your retirement benefit at 62.

Sandy’s eyes light up. “You​’re​ saying that if I work for three more years​ and take benefits early ― at 62​, I’ll get, for free, what amounts to ​more than​ a year’s income and that if I work three more years and then wait till 70 to collect, the gain is equivalent to getting paid this minute the equivalent of over three years of working. So working for three years coupled with being patient is like doubling my salary!”

“Yes, that’s exactly what I’m saying. Social Security’s benefit formula is extremely generous to people with short and low earnings histories. They are averaging your 35 years of highest earnings (after inflating earnings prior to age 60 based on the ensuring economy-wide wage growth) and you’ve only had 16 years of past covered earnings. So adding another 3 years of earnings gets rid of three zeros that are now being used to form your average.​ Plus, there is separate huge return from patience because Social Security annual benefits start 76 percent higher (adjusted for inflation) if you wait till 70 than if you take them at 62.​”

“​Wow​,” says Sandy. “​That’s fantastic. You just doubled my salary. Of course I’ll take the job and wait to collect.”

“My pleasure,” I say. “Social Security provides​ lots of​money ​that’s free ​for the taking if you just know where to look.”

To learn more about your Social Security options, visit Maximize My Social Security.

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