Social Security is a government program (well, Duh!!) so it should not be a surprise to anyone that it has lots of confusing rules and regulations. We are surrounded by experts galore stating different techniques to use regarding when and how to receive your maximum benefits. But, as a CPA, I have become very aware that many people are missing out on one of the most important steps to maximize your social security benefits. So, lets talk some basics.
When you are lucky enough to reach your 60's (it surely beats the alternative) and ready to start receiving social security, a simple calculation will be made to determine the starting amount of your monthly benefits. One of those pesky government analysts will look at your work history and will pick 35 of the years when you earned the highest wages. From those 35 years they will first do a fancy calculation to bring those wages up to todays values, In other words, they actually adjust those amounts to allow for inflation since earning $20,000 back in 1980 (milk was $1.19/gallon) does not buy you the same amount of groceries that $20,000 earned today does.
The sum total of all the adjusted earnings you received over the 35 years of your prime time will then be divided by the number of months included in 35 years (my calculator says 35 years x 12 months = 420 months, approximately) and that ladies and gentlemen will give you your "Average Indexed Monthly Earnings".(also called AIME). There are some other minor calculations done by the government but overall, the creation of this AIME is what determines how much you will receive each and every month until your demise, which we hope is well past 100.
So, what happens if you decide to take a break from earning a typical wage for a period of time. Lets say you just want to go to the beach and rent umbrellas to tourists for cash. And, because you went off the grid, according to the government payroll tax department, you end up recording wages for only 34 years instead of 35. That means your average monthly wage calculation (remember AIME) will use a "0" for one of your 35 work history years. Now, I hope I am not the only person with memories of skipping class while in school and of course I always managed to skip class when the teacher decides to have a "pop test". Receiving a big fat "0" on the test pretty much destroys your grade point average and then you spend the rest of the semester working on extra credit projects. Please tell me I am not the only person who had this experience... on multiple occasions.
My point here is that it is very important to pay attention to how many decent "wage earning" years you have before you decide to back off and slow down. The critical number here is 35. So hang in there and make sure you report at least 35 years of income to your favorite uncle (that be the government). And my advice to those kids in school is don't skip class... unless you are the teachers pet... or you are meeting a potential boyfriend/girlfriend... or you were a lot smarter than me (which is not hard). Whatever, just stay in class!
Phil Chandler, CPA, MBA is a principal with Leblanc & Chandler, CPA and a speaker, author and consultant on topics regarding tax, bookkeeping, accounting and business management. His education in accounting and engineering as well as background in accounting, construction and real estate provide him unique insights in what it takes to run successful businesses, especially in those specific industries.
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