You can't sign up for Social Security until you're at least 62, but in a way, you're claiming benefits from your entire working life. The decisions you're making right now have far-reaching effects that could either help or hurt you when it's time to sign up for the program. If you want the largest checks possible, you need to take the following steps during your working years.
Understand how the government calculates your benefit
The Social Security benefit calculation is a three-step process. First, the government calculates your average indexed monthly earnings, or AIME, which is your average monthly earnings over your 35 highest-earning years, with adjustments for inflation.
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That's done by multiplying your income for each year by an index factor, which is based on the average wage index (AWI). This tracks total wages earned by American workers divided by the total number of workers. Then, the government adds your adjusted income for each year and divides the total by 420 -- the number of months in 35 years.
Next, it plugs your AIME into the benefit formula designed for your birth year. The current Social Security benefit formula is as follows:
- Multiply the first $996 of your AIME by 90%.
- Multiply any amount over $996 but under $6,002 by 32%.
- Multiply any amount over $6,002 by 15%.
- Add your results from the steps above and round down to the nearest $0.10.
This formula follows the same steps every year, but the bend points change. These are $996 and $6,002 in the example above. The government adjusts them annually based on the AWI. You can view a list of bend points for all previous years on the Social Security Administration's website. Your benefit calculation uses the bend points for the year you turned or will turn 60.
The results of the above formula tell you how much you qualify for at your full retirement age. This is somewhere between 66 and 67, depending on your birth year.
For those who don't sign up at their FRA, the government runs an additional calculation to figure out how much to adjust your benefit up or down. Claiming benefits before your FRA reduces your checks. If you sign up at 62, you only get 70% of your full benefit per check if your FRA is 67, or 75% if your FRA is 66.
Every month you delay benefits increases your checks until you reach your maximum benefit at 70. This is 124% of your full benefit per check if your FRA is 67 or 132% if your FRA is 66.
Once you understand this, it's easier to identify several ways you can use this information to increase your benefits, including:
- Doing all you can to increase your income during your working years so you can secure a higher AIME.
- Working at least 35 years so you don't have any zero-income years factored into your benefit calculation.
- Considering delaying benefits if you can afford to and believe you'll get more out of the program by doing so than you would by signing up early.
If you're curious about what kind of a benefit you're entitled to at different starting ages, make a my Social Security account. There's a calculator there that can help you figure this out using data from your actual work history.
Make sure the government has your information right
The Social Security Administration gets its information about your annual income from the IRS so it's usually correct. But sometimes, errors creep in. If you change your name and fail to notify your employer or get your Social Security number wrong on employment documents, some or all of your income for the year might get lost in the shuffle.
This could cause the government to accidentally shortchange you when you sign up for Social Security. That's why it's crucial to check your Social Security earnings record at least once per year to ensure the income reported there matches up with your own records. You can find your earnings record in your my Social Security account, discussed above.
High earners may notice that their earnings record appears to be wrong for several years. This could be because their income for the year exceeded the cap on income subject to Social Security taxes. In 2021, you only pay Social Security taxes on the first $142,800 you earn. Anything over this amount won't increase your benefits so it won't show up in your earnings record.
This limit was slightly lower in previous years. If you frequently earn six figures and you notice apparent errors in your earnings record, it's a good idea to check the limit on income subject to Social Security tax for the year to see if you encountered this issue.
If you notice an error, you can submit a Request for Correction of Earnings Record form to the Social Security Administration, along with copies of any documents you have proving your actual income for the year. The Social Security Administration should investigate and change your earnings record if it finds your claim is valid.
Stay up-to-date on changes to Social Security
Social Security's trust funds are nearing depletion, a situation worsened by the mass unemployment caused by the pandemic. That doesn't mean the program's going to disappear, but it's unlikely to continue on in its current form for much longer.
The government will likely have to make some changes to the program to keep it sustainable for future generations. While many ideas have been kicked around in the past, including raising the full retirement age, lifting the ceiling on income subject to Social Security taxes, and reducing benefits, nothing's been decided yet.
It's important to stay up-to-date on what's happening with Social Security so you can quickly adapt to new changes. If the changes result in a benefit reduction, you should be prepared to compensate for this by contributing more money to your retirement account to cover what Social Security won't.
Keep these tips in mind as you move closer to retirement. Review them at least once per year to make sure you're doing all you can to increase your Social Security benefit. When you're finally ready to claim, you'll be glad you did.
