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The Social Security Secret No One Tells Women Who Don't Work

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Is this the year you'll decide if you should return to work? It's always a matter of weighing pros and cons -- and recently, at an excellent BNY Mellon "Women and Investing" conference, I learned why Social Security benefits are a big reason it makes sense to (as I say in my 9 Lives for Women blog), hang up your volunteer hat and "Find the Work that Fits Your Life."

In my coaching practice I advise women to consider a return to work from every angle -- taking into account all the professional, financial, psychological, family and logistical issues that come into play. I tell women they will be working not only for green, but also "fulfillment" dollars -- the inner satisfaction of feeling productive, capitalizing on education, stretching your intellectual pursuits and, as my mother used to say, having "something for yourself."

Too often, though, women -- and particularly their husbands -- focus only on green dollars, concluding it's not "worth it" for them to return to work: "By the time your relatively small back-to-work income is taxed in my (larger) tax bracket and we add in child care, household help, commuting costs and more, it just won't be worth it to return to work and turn our household upside down."

My advice is to give the "fulfillment dollars" more weight -- and realize that even savings from a small income can significantly add to a family nest egg over time. Women often overlook "the power of compounding," which is especially potent when they return to work in their 40s or 50s and save even small amounts for 20 years or more.

BNY Mellon conference speaker Michael McLaughlin, CFP of McLaughlin Asset Management in Haddonfield, NJ, gave an equally powerful argument that relates to Social Security. He pointed out that women who leave the workforce often don't realize they need a minimum of 10 contributing years to earn enough credits to be eligible for Social Security on their own earnings record. They also need as many strong earning years as possible, since Social Security calculates benefits on the average of their 35 best earning years. Many low and zero earning years (from an employment gap) yield lower benefits. It's wise to replace these years prior to retirement.

To illustrate, McLaughlin told me about a 62-year-old nurse who went back to work at age 53. Before taking a family hiatus from the workforce, this woman, Jane, worked and paid Social Security taxes for 22 years. These lower earning years (in her teens/20s) were augmented by nine high earning years once she returned to the workforce -- greatly increasing her Social Security benefit.

If Jane had not returned to work, she would have had the option of taking her own small benefit or claiming Spousal Benefits on her husband John's earnings record (50 percent of his benefit). But, by working for the past nine years (earning $75,000 in a flexible 30-hour a week job), she increased her own earnings record and benefits to the point that they surpassed the Spousal Benefits.

A higher benefit on Jane's own record also creates other options. McLaughlin delved deeper into retirement planning strategy to explain how Jane and John can increase their household income in retirement: Jane will file for Spousal Benefits when she is eligible at normal retirement age (66 if born between 1943 and 1959; 67 if 1960 or later), but delay applying for her own benefits until age 70. By waiting to age 70 to take her own benefit, her "retirement credits" will grow and her benefit will increase by 8 percent per year.

John, now 62, will apply for his benefit of $2,400/month at age 66. At age 70 Jane will switch from the Spousal Benefit to her own benefit which will have grown to $2,772/month. That's 32 percent higher than the personal benefit she could receive at age 66 of $2,100/month.

Because of the longevity in Jane's family, this added benefit will be worth the wait. To quantify, Jane's return to work and careful Social Security planning will more than double her Social Security earnings to a lifetime value of $1,202,389 (assuming a 2.8 percent cost of living adjustment and death at 95). If she had taken the Spousal Benefit for life, Jane's total Social Security payout would be approximately $598,636, a difference of $603,753.

The bottom line, McLaughlin says, is that a decision to return to work should not be based on what may be perceived as a modest annual salary. Even back-to-work jobs with salaries well below $100,000 are indeed "worth it" in fulfillment dollars and in the green dollars that will add significantly to your future Social Security benefit. Add in the tax-deferred savings in a matching 401(k) program and other possible benefits and your return to work plays a major role in your family's lifelong financial security.

This post is part of a series produced by The Huffington Post in conjunction with our women's conference, "The Third Metric: Redefining Success Beyond Money & Power," which took place in New York on June 6, 2013. To read all of the posts in the series and learn more about the conference, click here. Join the conversation on Twitter #ThirdMetric