Q: Does Social Security base the amount of my retirement benefit on my highest five years of earnings?
A: No. The program applies an “average wage index” to all your working years up to two years before benefit eligibility, then averages your income from your 35 highest-earning years. If you worked less than 35 years, Social Security includes those zero-income years in its average.
Q: What’s the advantage of waiting to file past my full retirement age?
A: For workers born in 1943 or later, waiting to file increases your monthly benefit by 8 percent a year until age 70. So waiting those four years boosts your benefit by 32 percent. You’ll earn “delayed retirement credits,” which are added back to your monthly benefit when you do file. Conversely, filing early reduces your benefit. If, say, your full retirement age is 66 and you file at 62, the age at which you’re first eligible for Social Security, your monthly benefit will be permanently reduced by 25 percent. (For those born in 1942 and turning 70 this year, the increase for waiting is 7.5 percent per year.)
Q: Will working after filing for Social Security reduce my monthly benefit?
A: If you file for benefits at full retirement age and continue working, Social Security will not reduce your monthly benefit. But if you file early (before full retirement age) and continue to work, your monthly benefit will be permanently reduced. And that amount will be further reduced if you earn more than the annual “earnings test,” or threshold, which is $14,460 in 2012. Until the year you reach full retirement age, Social Security withholds $1 for every $2 earned above the year’s threshold until you reach full retirement age. During the year you reach full retirement age, the ratio is $1 for every $3 earned above a new threshold ($38,880 in 2012) until full retirement age. At that time, your benefits will be increased to account for those months in which your benefits were withheld.
Q: Will getting a monthly pension cause my Social Security to be reduced?
A: No, unless your pension is from a federal, state, local, or foreign government system where you did not pay U.S. Social Security taxes. In that case, your monthly benefit will be reduced by two-thirds of your government pension. (For more information, check out Windfall Elimination Provision on the Social Security website.