Morgan Roopnarine

Increasing Your Average Indexed Monthly Earnings Amount (AIME)

What is increasing your average indexed monthly earnings (AIME)?

Your Social Security retirement benefit is based on your lifetime earnings. In general, if you were born after 1928, your benefit is calculated by averaging your 35 years of highest earnings to determine your AIME, then applying a benefit formula to that amount. To get the maximum payable monthly retirement benefit, your earnings in each of those 35 years has to equal the maximum earnings base (also called the contribution and benefit base) for that year. The maximum earnings base for 2021 is $142,800.

How does it work?

If you have earned less than the maximum base in any one of your earnings years, you can increase your AIME by working as long as you need to in order to replace that year of lower earnings with a year of higher earnings in the AIME calculation. This strategy is particularly effective if you can replace years of very low or zero earnings with years of higher earnings.

Rip worked continuously for 25 years before he was old enough to retire. However, when his retirement benefit was calculated, he had only 25 years of earnings, so 10 years of zero earnings had to be included in his AIME calculation. This lowered his AIME substantially and thus lowered his retirement benefit. So Rip decided to work 5 years longer so that his years of zero earnings would be replaced in the AIME calculation by his 5 years of higher earnings.

When is your AIME calculated?

When you become entitled to retirement benefits

At age 62, your AIME is calculated using your earnings up to and including age 61. Then a benefit formula is applied to your AIME to determine your primary insurance amount (PIA), upon which your retirement benefit will be based. Even if you choose to receive retirement benefits later, your PIA is established at age 62, although it will be recalculated later to account for money you earned after age 61.

When you have new earnings

The Social Security Administration (SSA) will automatically recalculate your AIME and PIA for any year you have new earnings–or earnings that were not included in the original AIME calculation–that are substantial enough to replace one of the 35 years in the benefit calculation. Because your AIME is calculated using your highest earnings years, this recalculation will always result in a benefit increase. This benefit increase is effective on January 1 following the year the earnings were paid.

Suzanne’s AIME was calculated in the year she turned 62 using her lifetime earnings up to and including age 61. However, Suzanne earned $40,000 during the year she turned 62, enough to replace a year of lower earnings in her AIME calculation. So the SSA automatically recalculated her AIME to include those earnings. When she began receiving retirement benefits three years later, her benefit reflected her new, higher AIME.

What earnings are used to calculate your AIME?

Earnings credited to your Social Security record

The earnings used to calculate your AIME are the earnings credited to your Social Security earnings record. This includes earnings both before and after retirement. If you’re employed in an occupation covered by Social Security, your employer reports your earnings annually to the SSA. If you’re self-employed, the IRS reports your earnings annually to the SSA. However, only wages or self-employment income up to the maximum earnings base for that year may be credited.

Earnings that are indexed and earnings that are not indexed

Most of the earnings used to calculate your AIME are indexed earnings, but some nonindexed earnings are also included. When calculating your AIME, the SSA first indexes (adjusts to reflect current wage amounts) any earnings you received after 1951 but before the year you turn 60. Next, the SSA picks out your highest 35 years of earnings to calculate your AIME. However, the SSA doesn’t just consider your indexed earnings in the calculation; it also considers your actual earnings (earnings you had at or after age 60, which are not indexed).

What earnings are not used to calculate your AIME?

Earnings that have not been credited to your Social Security record

The Wage and Tax Statement (W-2) that you receive from your employer reflects the amount of Social Security tax you have paid, as well as the amount of wages that should have been credited to your Social Security record that year. (Note: Your earnings reported to the SSA can’t exceed the maximum earnings limit for that year.) If you think your earnings have been incorrectly reported, contact the SSA to resolve the discrepancy.

Earnings not subject to Social Security taxes or the self-employment tax: There are many types of earnings that are not subject to Social Security taxes or the self-employment tax. Some of the most common types are listed as follows:

  • Social Security benefits
  • Payments under workers’ compensation law
  • Payments made to or from a qualified pension or annuity plan
  • Cash tips under $20 per month
  • Earnings under Civil Service Retirement System
  • Unemployment compensation

Because these types of income won’t count as earnings for Social Security purposes, don’t rely on them to help you increase your AIME.

When can this strategy be used?

You may be able to use this strategy when:
  • One or more years of little or no earnings will be included in your AIME calculation
  • You have earned less than the maximum during any of your 35 years of highest earnings
You will not be able to use this strategy if:

You have had maximum earnings in each of the 35 years included in the AIME calculation. In this case, you would not benefit from earning more because no earnings year can be replaced in the calculation by a year of higher earnings.

Strengths

You may increase your retirement benefit, as well as benefits for your family members

Anytime you increase your PIA (which is based on your AIME), your retirement benefit will increase. Because family members may also receive benefits based on your PIA, their benefits will increase as well when your PIA increases (as long as the family maximum doesn’t apply).

Tradeoffs

The difference between the new earnings and the old earnings may not be great enough to justify working longer

Before deciding to work additional years to increase your AIME, you should consider how much greater your new earnings will be than your old earnings. Say, for example, that your earnings during one of the 35 years used in the calculation are not much less than the maximum earnings allowed. In this case, the increase in the benefit you receive if you replace that year in the AIME calculation may not be substantial enough to justify working longer. However, if you have a year of no earnings included in your AIME calculation, you may profit more from substituting a year of high or maximum earnings for that year.

The additional payroll taxes you incur may limit the effectiveness of working longer

Your earnings during the additional years you work to try to increase your AIME will be subject to Social Security or self-employment payroll taxes. These taxes may lessen or eliminate the benefit you receive from working longer to increase your AIME.

Because Jasmine had a year of low earnings included in her AIME calculation, she decided that she could increase her AIME by working an extra year. So instead of retiring at age 62, she decided to postpone her retirement until age 63 and was able to substitute that year’s earnings of $40,000 for the year of low earnings in her AIME calculation. This increased her retirement benefit by $1 per month, or $12 per year. However, because she was self-employed, she had to pay 7.65 percent in payroll taxes on that year’s earnings, or $306. Therefore, it took Jasmine more than 25 years ($306 divided by 12) to make up the increased taxes she paid working an additional year to increase her AIME.

Increasing your AIME may only marginally affect your benefit if your AIME already falls in the top tier of the benefit formula

Once your AIME is calculated, a benefit formula is applied to it to determine your primary insurance amount (PIA). Because this benefit formula is weighted to favor low-income individuals, increasing your AIME may not be an effective strategy for you if your AIME is already in the top range of the benefit formula, because only 15 percent of your AIME will be affected.

Julio’s AIME was calculated to be $3,000 in 1998. The SSA figured Julio’s benefit (using 1998 bend points) by adding together three percentages of his AIME:

90% of the first $477

$ 429.30

32% of the AIME from $478 to $2,875

$ 764.04

15% of the AIME greater than $2,875

$ 18.75

$1,212.09

Since Julio’s AIME was already in the top range of the benefit formula, he wouldn’t have benefitted much from extra earnings. If, for example, Julio had managed to increase his AIME to $3,200, here’s what would have happened:

90% of the first $477

$ 429.30

32% of the AIME from $478 to $2,875

$ 764.04

15% of the AIME greater than $2,875

$ 48.75

$1,242.09

Even though Julio increased his AIME by $200 by working additional years, he only increased his monthly benefit by $30 (2.47 percent).

However, if Julio’s AIME was in the middle portion of the formula, he would have benefitted more from increasing his AIME. For example, if Julio’s AIME was calculated to be $2,600, here’s what would have happened:

90% of the first $477

$ 429.30

32% of the AIME from $478 to $2,875

$ 679.36

$1,108.66

However, if he increased his AIME to $2,800, here’s what would have happened:

90% of the first $477

$ 429.30

32% of the AIME from $478 to $2,875

$ 743.36

$1,172.66

In this case, when Julio increased his AIME by $200 by working additional years, he increased his monthly benefit by $64 (5.77 percent).

Note: Bend points for 2021 are $996 and $6,002.

Questions & Answers

Will earnings after retirement affect your AIME?

Yes. Any covered earnings you receive after you begin getting retirement benefits can be included in your AIME calculation. However, if you retire early and continue to earn income, you can only earn up to a certain amount (called the earned income limit) before you begin to lose benefits due to excess earnings. Conversely, if you don’t elect to receive early retirement benefits, the amount you earn by working won’t ever affect your benefit negatively. In addition, your earnings at the end of your career tend to be your highest ones, and they can then be substituted for lower ones in your AIME.

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Broadridge Investor Communication Solutions, Inc. prepared this material for use by Social Security Benefit Planners, LLC.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Social Security Benefit Planners, LLC  provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Social Security Benefit Planners, LLC and its affiliates are in no way associated with or approved, endorsed, or authorized by the Social Security Administration.

Paying the Bills: Potential Sources of Retirement Income

Piggy bank with stacks of coins beside it. Article title: Paying the Bills: Potential Sources of Retirement Income

Planning your retirement income is like putting together a puzzle with many different pieces. One of the first steps in the process is to identify all potential income sources and estimate how much you can expect each one to provide.

Social Security

The vast majority of people age 65 and older receive Social Security benefits. However, most retirees also rely on other sources of income.

For a rough estimate of the annual benefit to which you would be entitled at various retirement ages, you can use the calculator on the Social Security website, ssa.gov. Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. How much you receive ultimately depends on a number of factors, including when you start taking benefits. You can begin doing so as early as age 62. However, your benefit may be approximately 25% to 30% less than if you waited until full retirement age (66 to 67, depending on the year you were born). Benefits increase each year that you delay taking benefits until you reach age 70.

As you’re planning, remember that the question of how Social Security will meet its long-term obligations to both baby boomers and later generations has become a hot topic of discussion. Concerns about the system’s solvency indicate that there are likely to be changes in how those benefits are funded, administered, and/or taxed over the next 20 or 30 years. That may introduce additional uncertainty about Social Security’s role as part of your overall long-term retirement income picture and put additional emphasis on other potential income sources.

Pensions

If you are entitled to receive a traditional pension, you’re lucky; fewer Americans are covered by them every year. Be aware that even if you expect pension payments, many companies are changing their plan provisions. Ask your employer if your pension will increase with inflation and, if so, how that increase is calculated.

Your pension will most likely be offered as either a single or a joint and survivor annuity. A single annuity provides benefits until the worker’s death; a joint and survivor annuity provides reduced benefits that last until the survivor’s death. The law requires married couples to take a joint and survivor annuity unless the spouse signs away those rights. Consider rejecting it only if the surviving spouse will have income that equals at least 75% of the current joint income. Be sure to fully plan your retirement budget before you make this decision.

Work or other income-producing activities

Many retirees plan to work for at least a while in their retirement years at part-time work, a fulfilling second career, or consulting or freelance assignments. Obviously, while you’re continuing to earn, you’ll rely less on your savings, leaving more to accumulate for the future. Work also may provide access to affordable health care.

Be aware that if you’re receiving Social Security benefits before you reach your full retirement age, earned income may affect the amount of your benefit payments until you do reach full retirement age.

If you’re covered by a pension plan, you may be able to retire and then seek work elsewhere. This way, you might be able to receive both your new salary and your pension benefit from your previous employer at the same time. Also, some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age while you continue to work part-time for the same employer.

Other possible resources include rental property income and royalties from existing assets, such as intellectual property.

Retirement savings/investments

Until now, you may have been saving through retirement accounts such as IRAs, 401(k)s, or other tax-advantaged plans, as well as in taxable accounts. Your challenge now is to convert your savings into ongoing income. There are many ways to do that, including periodic withdrawals, choosing an annuity if available, increasing your allocation to income-generating investments, or using some combination. Make sure you understand the tax consequences before you act.

Some of the factors to consider when planning how to tap your retirement savings include:

  • How much you can afford to withdraw each year without exhausting your nest egg. You’ll need to take into account not only your projected expenses and other income sources, but also your asset allocation, your life expectancy, and whether you expect to use both principal and income or income alone.
  • The order in which you will tap various accounts. Tax considerations can affect which account you should use first and which you should defer using.
  • How you’ll deal with required minimum distributions (RMDs) from certain tax-advantaged accounts. After age 72, if you withdraw less than your RMD, you’ll pay a penalty tax equal to 50% of the amount you failed to withdraw.

Some investments, such as certain types of annuities, are designed to provide a guaranteed monthly income (subject to the financial strength and claims-paying ability of the issuer). Others may pay an amount that varies periodically, depending on how your investments perform. You also can choose to balance your investment choices to provide some of both types of income.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Inheritance

An inheritance, whether anticipated or in hand, brings special challenges. If a potential inheritance has an impact on your anticipated retirement income, you might be able to help your parents investigate estate planning tools that can help reduce the impact of taxes on their estate. Your retirement income also may be affected by whether you hope to leave an inheritance for your loved ones. If you do, you may benefit from specialized financial guidance that can integrate your income needs with a future bequest.

Equity in your home or business

If you have built up substantial home equity, you may be able to tap it as a source of retirement income. Selling your home, then downsizing or buying in a lower-cost region and investing that freed-up cash to produce income or to be used as needed is one possibility. Another is a reverse mortgage, which allows you to continue to live in your home while borrowing against its value. That loan and any accumulated interest is eventually repaid by the last surviving borrower when he or she eventually sells the home, permanently vacates the property, or dies. (However, you need to carefully consider the risks and costs before borrowing.)

If you’re hoping to convert an existing business into retirement income, you may benefit from careful financial planning to help reduce the tax impact of a sale. Also, if you have partners, you’ll likely need to make sure you have a buy-sell agreement that specifies what will happen to the business when you retire and how you’ll be compensated for your interest.

With an expert to help you identify and analyze all your potential sources of retirement income, you may discover you have more options than you realize.

Thank you for taking the time to read this article. We hope it has given you some insight into Social Security and retirement.  If you have any questions or would like more information, please feel free to contact us. We would love to hear from you. Our newsletter is a great way to stay up-to-date with our latest offerings and get helpful retirement planning tips. Signing up is easy; click here.

Source

Broadridge Investor Communication Solutions, Inc. prepared this material for use by Social Security Benefit Planners, LLC.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Social Security Benefit Planners, LLC  provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Social Security Benefit Planners, LLC and its affiliates are in no way associated with or approved, endorsed, or authorized by the Social Security Administration.