Social Security's 35-Year Rule Could Be Quietly Shrinking Your Monthly Check

No matter how well you've prepared for retirement and how much money you've saved, you'll probably end up depending on Social Security to make ends meet. Fidelity puts the average 401(k) plan balance for 65- to 69-year-olds at $258,800. Using the popular 4% rule, that only results in about $10,350 of annual income. So it's easy to see why you might need Social Security on top of your savings.

Whether you expect to rely on Social Security a lot or a little, it's important to claim benefits at the right time. That's because your filing age plays a role in how much money the program pays you each month.

But your earnings history plays an equally important role in determining how much Social Security you get to collect, and there's one rule that could end up shrinking your monthly benefits substantially.

How Social Security benefits are calculated

The Social Security benefits you're eligible for in retirement are based on your personal earnings history. The Social Security Administration (SSA) takes your 35 highest-paid years of income into account when determining your benefit, and earlier wages in that formula are adjusted for inflation.

From there, you're eligible to start collecting Social Security benefits once you turn 62. But you won't get your monthly benefit based on your wage history without a reduction until you reach full retirement age (FRA). FRA is 67 for recipients born in 1960 or any year after that. You can also delay your Social Security benefits claim past FRA for boosted checks.

Why the 35-year rule could come back to bite you

For some people, attaining a 35-year work history is not so hard. But for others, it's not easy.

Some workers are forced to take extended career breaks to raise children, care for aging family members, or recover from injuries or illnesses. And people in physical jobs can't always do them for 35 years, since they can take a toll much earlier.

The problem is that if you don't have 35 years of earnings on record, when the SSA goes to calculate your Social Security benefit, you'll have a $0 factored into that formula for each year you're missing wages. Those zeros could bring down your average wage and result in smaller Social Security checks.

How to boost your wage history

If you're nearing retirement and you haven't managed to work a full 35 years, one thing that might help is continuing to work while getting Social Security. There's no rule stating you can't do that, though if you haven't reached FRA, you will need to be mindful of Social Security's earnings test. Earning too much money could result in having benefits withheld temporarily.

But let's say you've reached your FRA and begin claiming Social Security then. If you only have a 32-year work history, you'll have three zeros factored into your benefits formula.

On the other hand, if you work part-time for three years starting at FRA and earn $24,000 per year, you'll replace each zero with a $24,000 wage. That could result in larger checks once those wages are reported to the SSA, which will then recalculate those payments.

Make sure your earnings record is correct

Since your wage history helps determine how much Social Security you get to collect, it's important to make sure the SSA has the right information on file for you. To that end, you can create an account on SSA.gov and check your earnings statements. Those statements should contain a summary of your wages each year.

Underreported wages could result in smaller Social Security checks. If you see an error that works against you, make sure to reach out to the SSA to request a correction to your record.

You may need to provide old pay stubs, W-2s, or tax returns to prove that your actual earnings were higher than what the SSA is showing. It's best to take this step before you're ready to file for benefits so that everything can be sorted out before those monthly checks need to start.

Bottom line

There's a good chance Social Security will be an integral part of your retirement plan. So it's important to know what goes into those monthly benefits.

If you don't have a 35-year work history, you could end up getting smaller benefit checks for life. Review your earnings record and, if possible, try to work longer to reduce the number of zero income years that are factored into your personal benefits calculation.

Working longer could actually boost your Social Security checks in two ways, though. Not only might you replace zero income years with actual wages, but holding down a job a few extra years could make a delayed claim possible. That could give your benefits an additional boost that makes it easier for you to cover your expenses throughout your retirement.

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