Since I quit working at age 38, I have a lot of zero years in my SS earnings record. When I was doing some research on SS, I found that the income up to that first “bend point” gets a 90% credit, while the last tranche of FICA collected from a high-income earner only gets a 15% credit.
I obviously wasn’t interested in “working the door” at my local Walmart, but I figured out that I could volunteer for FICA by collecting some author’s royalty payments through a small business, then pay FICA on the profit (first “bend point” is up to $13,380/yr in income for 2022). That essentially allows you to buy an inflation-adjusted life annuity for about half of what a for-profit insurance company would charge for the same monthly benefit. See link:
Except that if your AIME including your $0 years is already above the first or second bend point, you’re only going to be earning 32% or 15%, not 90% Your $9k/year will replace some of your $0 years, which will increase your AIME up by about $25/month for each year you earn the $9k, after the inflation adjustment. ($21.43/month without adjusting for inflation.) So, 5 years of $9k/year added $125 to your AIME, which would have added $40 to your PIA if you’re above the first bend point, or $18 if you’re above the 2nd bend point. The fact that your table shows an additional $27/month means that the additional earnings probably pushed you from slightly under to slightly over the 2nd bend point.
I will point out that earnings after 62 are still counted towards your 35 highest earning years, but they will not be indexed to inflation. Rather, they would just add the unadjusted $21.43/month to your AIME for each $0 year that you replace, which would add $3 to your monthly PIA, since you’re now above the 2nd bend point. You could continue to do that until you end up with 35 non-zero years. That said, a marginal $36/year return on paying $954 in OASDI taxes a year is only a 3.7% return.
Except that the marginal $36/year return is allowing me to buy an inflation-adjusted life annuity from the US Gov’t at half the price a commercial insurer would charge, so you would need to at least double that 3.7% return.
Even if you wait until age 70, an additional $36/year only adds an additional $44/year compared to your PIA at FRA. At best your marginal return is 4.6%, not double.
A return of 4.6% to age 70, plus the value of buying an inflation-adjusted life annuity at age 70 for half price. Too many people ignore the value of the 1/2 price life annuity.
I thought that the Social Security Administration only indexed insured earnings prior to age 60. Starting at age 60, insured earnings were no longer indexed for inflation. Has indexing of insured earnings changed since I retired in 2013?
No, but the OP had referenced in the article that he cited that he was getting royalty income for 5 years: from 57 - 62. I was just pointing out that for his specific case, if he continued to have $9k in income that he paid self-employment taxes on, it would add about $3/month to his PIA.
@aj485 Is there a good Social Security calculator somewhere out there? I don’t mean the standard one that allows you to enter estimated earnings, and calculates estimated benefits, but rather one that allows entry of these variations we discussed and calculates actual benefit changes.
" Looking at the difference in the monthly benefit between CASE 3 and CASE 4 in the table below, you’ll see that those 5 years of $9,000 annual FICA earnings and a total payment of of $4,844 in FICA taxes increased the monthly Social Security benefit by $26/month. Let’s compare this to the cost of purchasing an inflation-adjusted life annuity from an insurance company.
At current rates, a $100,000 premium would buy a 62-year-old about a $350/month benefit from an insurer with a high rating. That calculates to about $17/month for a $4,844 premium. The Social Security benefit I “bought” for $4,844 in FICA taxes is more than 50% higher than what an insurance company would offer.
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Also, people in the Top 20% of the wealth/income pyramid tend to live 4 or 5 years longer than the average American. If I can buy an inflation-adjusted life annuity at a big discount to what a commercial insurer charges, it’s likely a good bet. Though not as good as “free Obamacare”. [LOL]
I checked my SS earning record, and the last year I paid any FICA was at age 58. So I haven’t run afoul of that age 60 rule that cuts off indexing earnings to inflation.
I still don’t see any math showing ‘at least’ a 7.4% return. I see a lot of hand-waving talking about how you are increasing your lifetime annuity cheaper than you could buy an annuity from a commercial insurer, but since we all know that you wouldn’t buy an annuity from a commercial insurer, there’s no actual math there to show your rate of return.
Again, you have no actual math to prove your declaration that you are earning at least a 7.4% marginal return on your ‘investment’. And while you may ‘tend’ to live 4 or 5 years longer, you aren’t discounting for the fact that you may also die earlier.
Same thing for any investment I make. There’s some probability I’ll make money, and some probability I won’t. You add the pluses and minuses and choose the path with the greatest expected result. If I die early, I won’t care. I’ll be dead.
For example, we know that the value of average home in the US barely keeps up with inflation, while over the long term, the stock market gives you inflation plus 6% to 7%. I made the judgement 40 years ago that you want to have as little money as possible invested in real estate and overweight the stock market – so far, so good.
An inflation-adjusted life annuity is the highest quality retirement asset a person can own. You don’t see too many retired military people looking to cash in their pension so that they can play with the money in the stock market.
If the Federal Gov’t gives me the opportunity to buy an inflation-adjusted life annuity at a big discount to what an insurer would charge, I’ll likely be a buyer. Especially since the Gov’t doesn’t account for “adverse selection” (i.e., the risk that only healthy people will buy the annuity.)
Oh please. You reported the number to the 10th of a percentage point, implying confidence in the 7.4% to the tenth of a percent. You claim to be an engineer, and as such should understand significant numbers. It’s misleading to state on one hand that “you are earning at least a 7.4% marginal return,” implying precision to the tenth of a percent, and then waive your hands and say “You add the pluses and minuses and choose the path with the greatest expected result.” Misleading at best.
Aj was the one who quoted a 7.4% return. I said it was about double. As an engineer who understands actuarial science, I know that the return on an inflation adjusted life annuity is dependent on when you die and the inflation rate during the period of time that the monthly benefit is being paid out.
I bought the annuity (by volunteering to pay FICA) at a discount to what an insurance company would charge at the time, and given the difference in life expectancy between the average SS beneficiary and those in the top 10% to 20% of the income pyramid, I expect to beat the SS “breakeven” age of 81 or 82 for delaying until age 70 by 5 or 6 years – let’s say I expect to live to age 87. Those are the assumptions. Input your guess for the inflation rate and you can calculate it to any many significant (i.e., “insignificant”) digits as you like.
SS itself says that every year of delayed SS causes the payout to grow by 8%.
So, every 100 dollars that SS says they gonna pay me, grows $8 for each each year of delay.
Each $1 generates $0.08.
This is COMPOUNDED every year of delay. At 8%.
The amount paid out INCREASES (COMPOUNDS!) year after year at 8%. You know - more $ to spend.
I see all the hand wringing (see, I’m keeping the hand theme going) about how big “it” is, but the bottom line is more $SS, compounding at 8% each year of delay.
You know - more $ compounding into MORE $. For me to spend, or turn over to the AL facility so I can have bread with my gruel.
THAT’S why I choose to delay.
Here’s the posed question:
Does “earned income” for a current year replace a “zero year” and add some $ to the potential payout? (Hint: in my case, back in 2015, a high current year income replaced a much lower 35-year-ago income year).
If so, do those “current” dollars compound at 8%?
Furthermore, SS announced about an 8% COLA a couple months ago.
Were only “selected” funds COLA’d or was the whole enchilada COLA’d?
Yall can argue about whose tree is bigger all you want.
But you seem to be losing sight of the forest (more $ when you start taking SS).
It depends on the size of your AIME (Average Indexed Monthly Earnings). You get a fantastic 90% credit up to the first bend point of $1,024/month ($12,228/yr), a 50% credit if your AIME is between $1,024/month and $6,172/month ($74,064/yr), but only a 15% credit above $6,172. I definitely wouldn’t be looking to “buy” an inflation-adjusted life annuity by volunteering for FICA if my AIME was high enough to be in the 15% category. It’s only a strategy for those with a lot of zeros in their earnings record.
As Aj pointed out, any earnings after age 60 are no longer indexed for inflation when calculating your SS benefit, but you would still get the 8% per year for waiting to age 70. You just won’t be getting the 8% per year plus the 8.7% inflation adjustment you’d be getting on your pre-age 60 earnings record.
And that’s why the dumbest thing you can do in America, tax-wise, is to work for wage & salary income.
The overall point is that ANY increase to the monthly (or annual) payout increases at 8% each year (until age 70). And each incremental increase is compounded each year.
Yes. There are lots of DETAILS that affect the total. My take away from the details that affect me, today, is that it would indeed be DUMB to go back to work as a way of increasing my SS benefit.
ralph
I’m tracking at least 3 categories with topics in which the posters are arguing whose tree is more colorful.
