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Senior Correspondent

We never really pay attention until it’s “about us.”

And by then, it’s too late.

As employees, we have little choice about what’s declared to Social Security: our employer takes out of our paycheck both the employer’s portion and ours.

But as entrepreneurs (whether we have a job elsewhere or not)…

As entrepreneurs, we live in a world of “I’ll do the best I can today and I know I’ll have more money in the years to come.” That’s an entrepreneur’s natural optimism. But that means thatwe give priority to our cash flow today to be sure we’ll have the resources needed to build or maintain our businesses.

(Retirement is the last thing on our minds.)

That mindset also affects what we declare as salary when we have a choice.

For example, say we are set up as a “Sub S” Corporation and we take part of our income as salary and part as profits from the corporation. We pay taxes, regardless what we call it. But we may take a bit less as salary because that implies having to pay Social Security and Medicare on those earnings.

When we’re young, our need for cash flow feels far more important than our future need for Social Security income.

Time for Social Security

Then, sometime in our sixties, we start looking in earnest at what we’ll receive from Social Security. We start researching how the payments are calculated. (For some reason, we’re totally disinterested until it’s almost time to apply for this benefit.)

Here’s how it works (great little worksheet on that link!):

“Social Security benefits are based on your lifetime earnings. Your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. We apply a formula to these earnings and arrive at your basic benefit, or “primary insurance amount”. This is how much you would receive at your full retirement age — 65 or older, depending on your date of birth.”

In short, they take the top 35 years of income (adjusted), add it together and take an average. Say you have 40 years in which you reported income. They’ll take the top 35 years and ignore the rest. But say you have only 33 years in which you reported income. They’ll take those 33, add zeroes for the missing years, and average that.

Needless to say, each year is important but those “zeroes” are killers!

And by then, oh how we wish we had taken higher salaries and paid the darn Social Security. But it’s too late.

How I Shot Myself in the Foot

Why am I writing about this? Because I just got a wake-up call about the early years in my business. Then, cash flow felt so critical that I took a modest salary from my corporation and let the difference flow through as profits. Nothing “wrong” about what I did.

But it was very short-sighted. If I had taken more as salary and paid the extra 15% or so, I’d have made it up somehow. I could have just cut out one of those forgettable vacations. Or tightened my belt.

But today that fact is locked into the amount of money I will receive as Social Security benefits for the rest of my life.

This is just a heads-up. Retirement and Social Security feel like distant mirages, a lifetime away. (And the popular thing to do today is just write off Social Security altogether, saying it won’t be there for you when the time comes.) But that time is not so far away. No matter how young you are now, it sneaks up on you.

And you’ll bear the brunt of those decisions forever.

Take it for what it’s worth — a little heads up, a “gift” from someone who is a money expert. But who still made the dumb moves so many of us make.

Try not to make them yourself.

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