Tuesday, June 19, 2012

A Social Security Hint For Stay At Home Parents and Other Part-timers

If you're a stay at home parent, or have been laid off, or are otherwise not working full time, you can still do something to prepare for retirement. That would be to work part-time, because even a small amount of earnings from part-time work builds your Social Security record.

To be eligible for Social Security retirement benefits, you first need to accumulate 40 credits. You get a credit by earning a minimum amount ($1130 in 2012 for each credit, with this amount to be adjusted over time as wages increase). You can earn up to 4 credits per year. Thus, it takes at least ten working years to earn 40 credits. If you don't have 40 credits, even a small amount of earned income from part-time work can help you earn more credits.

Once you have 40 credits, your Social Security benefits will be calculated based on your highest 35 years of earnings. People who work a full career until their 60s will have 35 or more years with earnings. But stay at home parents and many other people who, for whatever reasons, don't work a full career, may have many years with zero earnings. Those zero years bring down the level of benefits to which you would be entitled. By working even a little during some of those years, you'd reduce the number of zero years, thereby boosting your benefits.

If you're not allergic to math, here's a more detailed explanation of what happens (in 2012 dollars; the amounts discussed below will increase over time as wages increase). Social Security calculates your total earnings for your top 35 years (with the earnings from earlier years adjusted to their equivalents in today's dollars). Then it divides the total by 35 and divides the result by 12, to get an average monthly earnings for your top 35 years. It then takes the first $767 of that average monthly figure and multiplies by 90%. You'll get that 90% in your benefits. Then Social Security takes the next $3857 in your average monthly earnings and multiplies by 32%. You'll get the 32% in your benefits. Any amount in your average monthly above the $3857 tier is multiplied by 15%. That 15% is added to your monthly benefit.

In brief, Social Security replaces 90% of the first $767 of your average monthly earnings, 32% of the next $3857 of your average monthly earnings, and 15% of anything above that. When you have a lot of zero years in your Social Security record, your average monthly earnings may fall below the $767 level, and any increase in that average will improve your Social Security benefits by 90% of the increase (until you surpass the $767 level). This is worth working for.

Maybe you plan to collect under your spouse's Social Security record. That can often be advantageous, assuming your spouse has a substantial record and you remain married to that spouse long enough. But life is unpredictable, and your own Social Security record can't be taken away from you. Building it up makes sense.

These days, incomes are stagnant, investment returns are volatile and often lousy, and homes are still dropping in value (on a national basis). Upticking your Social Security benefits by working part-time, even if just a little, is a way to improve your retirement. Ignore the cocktail party wisdom that Social Security won't be around for you. It will. Maybe not in its current form. But some kind of national retirement benefits program will be in place. With half of all Americans not saving at all for retirement, and many others not saving enough, we can't afford not to have a Social Security program. Make the most of it.

For more on Social Security, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html (how Social Security benefits are calculated), http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html (when to start collecting), and http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html (who is eligible to collect).

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