Survey after survey confirms that many American workers are falling behind in their retirement savings. It’s not a fun place. Without sufficient savings, you’ll likely wonder when you can retire and what kind of lifestyle you can sustain after leaving the workforce.
Repaying your savings is a priority in this scenario, but there is another complementary strategy to consider. This is to increase your Social Security income. A higher Social Security income allows you to withdraw lower annual withdrawals from your retirement account. And taking less from your savings each year should help you stay solvent longer.
How Social Security Works
Under current Social Security rules, you can increase your benefits by increasing your average income. It’s not a quick fix. It’s a strategy that works if you give it enough time.
Social Security calculates your benefit based on your average monthly income over your 35 highest-paying years of work. Note two points about this calculation:
- If you worked for less than 35 years, Social Security uses zero income for the missing years.
- Before calculating your 35-year average, Social Security adjusts your salary for inflation. So your income 25 years ago, for example, could be about the same as today’s income if your increases didn’t outpace inflation.
To check this, you need to divide the national average wage index for the current year by the national average wage index for a previous year. Then multiply the result by your earnings from the previous year. The answer is the current year’s equivalent of the previous year’s earnings. If this answer is greater than what you are making today, your inflation-adjusted income has gone down instead of up.
Given these two points, there are three ways to increase your average income, which, in turn, increases your Social Security benefit. You can extend your work history to 35, upgrade to a higher level job, or start working part-time during your off hours.
1. Work at least 35 years
If your work history is less than 35 years, reaching that 35-year milestone naturally increases your average income. In effect, you will replace years of zero income in the average income calculation with higher values.
2. Get a top-level job
A simple merit increase in your current role may not have much impact on your retirement benefits. What you want is a salary increase large enough to outpace salary inflation. This may require promotion.
The good news is that a promotion-related pay increase increases your earnings for the current year and hopefully for all years to come. The more years you can work at the highest salary scale, the more impact you will see on your retirement benefits.
As a bonus, you can use the extra income to increase your retirement contributions.
3. Add part-time income
Sometimes adding part-time work to your routine is easier than getting a promotion. With expertise in a professional field, for example, you might have the opportunity to land consulting or outsourcing jobs. Or, you can try working for a carpooling, gardening, or DIY service company to earn some extra money.
Whether you choose self-employment or a traditional part-time job, you will report the additional income on your tax returns. Any income from self-employment is subject to self-employment tax.
Similar to getting a promotion, the sooner you implement this strategy, the bigger the change you might see in your edge.
Projection of the potential increase in your benefits
Social Security provides several tools to project your retirement benefit at different income levels. The most accurate is the benefit estimator within my Social Security. The estimator calculates your expected profit using your reported earnings history.
The estimator also assumes that your average future annual salary will be equal to what you earned in the previous tax year. You can change this number manually to see an updated estimate. Test different average future income figures to see what income you need to produce the retirement benefit you want to.
There are obvious trade-offs to extending your career, having a higher-level job, or working more hours. Projecting the potential gain in your Social Security benefits can help you decide if these trade-offs are worth it.
If the trade-offs aren’t worth it, you might consider creating a passive income stream to supplement Social Security and your savings distributions. Or, you could downsize now to reduce your income needs later. It would also free up more money to send to your retirement account.