How Losing Your Job Now Can Cost You Social Security Money Later

A layoff might be a kick in the butt now, but it could also take a bite out of your Social Security benefits later.

Think of it as the takeaway that keeps on taking, whether you were just starting your career or, even more markedly, if you’re 10 to 15 years from your planned retirement.

Each situation differs, but the Social Security Administration’s online calculators indicate a midcareer job separation could cost you $40,000 over 25 years of retirement. And if you have a spouse relying on your earnings to collect benefits equaling half of yours, that could inflate the loss to $60,000.

“Higher lifetime earnings result in higher benefits,” the administration says. “If there were some years when you did not work or had low earnings, your benefit amount may be lower than if you had worked steadily.”

Jim Steele, 57 and laid off in 2013 from an information technology position in Conway, Arkansas, has been working toward a programming degree. Upon checking his retirement benefit estimate online, he said he was concerned about his projected Social Security benefit falling.

“It’s just one more reason to get back to work as quickly as possible,” Steele said.

He’s not alone.

About 4.6 million workers a month left their jobs in 2014, the Bureau of Labor Statistics estimates. That’s about the population of Philadelphia and Chicago combined. A little over half of those workers quit; about one in three were let go involuntarily through layoffs and other discharges. More than one in three unemployed workers stayed out of the workforce 27 weeks or longer, BLS says.

Late-career job loss: The double whammy

The Social Security Administration bases your retirement benefit on your top 35 years of earnings after they’re indexed and averaged monthly.

Lop off a few years of earnings, and that monthly average can drop significantly, leading to a lower “primary insurance amount,” the benefit you’d get at “normal retirement age,” which is 66 for most people retiring now, 67 for those born in 1960 and later. You will collect less than the monthly primary amount if you retire early, as young 62; you get more if you delay, up to age 70.Losing your job after age 45 can add insult to your earnings injury. The BLS says workers’ earnings usually peak between age 45 and 64. That means higher wages you expected to earn will no longer be available to boost your monthly average, which will be calculated on wages lower than you’d likely earn if you’d stay in your job.

A $135 swing in monthly benefits, a typical result from a late-career job loss, would add up to $40,500 over 25 years.

Age of enlightenment

Social Security benefits may seem a long way off.

Allan Townsend, 50, laid off in 2014 from a senior site manager role at Microsoft, where he’d worked nearly nine years, said Social Security was “not even on my radar” when MoneyTalksNews.com first asked him about his potentially lower benefit.

“In fact, my entire focus is on finding a new job. … I’ve always thought myself as part of the ‘doomed-to-work-forever generation.'”

After further consideration, he signed up for an online Social Security account and checked his online statement.

It showed how much he could expect to collect at age 62, 67 and 70 based on his 31 years of “taxed Social Security earnings” and “current earnings rate, if you continue working,” a key consideration.

“I am trying to find a new position that is at least equal in pay. I’m motivated more now. … Lots of good information is available. I would recommend everyone taking the time to do it [sign up for a my Social Security account].”

Coping after buyout

Mike Rynearson took a company buyout from his photo editing job in 2008 at age 53 after 25-plus years at The Arizona Republic newspaper.

At the time it was estimated that if he never paid into Social Security again and started collecting reduced early retirement benefits at age 62, his benefit would be $33 less each month than if he had kept working at the same pay; for an age 66 retirement, the difference would be $90 a month.

Over a 25-year retirement, that difference would add up to $9,900 for early retirement, $27,000 for normal retirement age.

“It doesn’t seem like a lot each month, but it really does add up over time,” Rynearson said.

He and partner Deirdre Hamill, a photojournalist laid off later from the Republic, started a travel documentary photography business, which, while rich in globe-trotting opportunities, is not particularly profitable.

“My yearly income dropped significantly over the last six-plus years, so my projected monthly benefit dropped accordingly, also just as predicted,” Rynearson told MoneyTalksNews.com.

Now that he’s 59-1/2, Rynearson no longer has to pay a 10 percent penalty on early withdrawal from his private retirement savings accounts.

He said he expects to begin drawing Social Security benefits at age 62.

Maximizing your benefits

For many of us, Social Security benefits make up a substantial chunk of retirement income. In 2014, the average individual retired worker received a $1,294 monthly Social Security benefit; couples, $2,111. Just over half of elderly married couples and nearly three out of four elderly singles receive at least 50 percent of their incomes from Social Security, the administration says. So it’s worth strategizing to get the most from them.

You can check out your benefits by signing up for an online Social Security account or using Social Security’s Retirement Estimator or even its Quick Calculator. The calculators let you test different retirement ages and future earnings amounts.

The easiest way to get a bigger monthly Social Security check is to delay your retirement date, if you can wait. Many people don’t. The New York Times says 41 percent of men and 46 percent of women reaching age 62 apply for Social Security.

Your primary insurance amount is reduced 8 percent a year for each year you retire before reaching your normal retirement age. But if you were born in 1943 or later, you will get an additional 8 percent per year for each year you delay benefits, up to age 70.

To delay, you may have to draw on your private retirement savings, such as 401(k) or IRA accounts, or find some kind of job.

Married couples have more options, especially if one spouse has reached full retirement age and still works.

A spouse may claim benefits based on his or her own earnings record or apply for a benefit of up to 50 percent of the other spouse’s full retirement benefit.

Married couples may take advantage of file-and-suspend rules as explained by the Social Security Administration: “If your current spouse is [at] full retirement age, he or she can apply for retirement benefits and then request to have payments suspended. That way, you can receive spouse’s benefits and he or she can continue to earn delayed retirement credits until age 70.”

While the Social Security calculators let you test scenarios for free, private software solutions are also available.

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