Social Security is an important source of retirement income for many. Unfortunately, the rules surrounding this benefits program can be very difficult to navigate. In fact, many future retirees find themselves puzzled about the details and unsure of how to maximize their monthly checks.
The good news is, there are only three Social Security secrets you must know in order to get the biggest possible check. Here's what they are.
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1. Your age when you claim benefits affects your check amount
One of the most important things to know about Social Security is that your choice of when to receive your first check will impact how much money you get each month.
Depending when you were born, you have a designated full retirement age (FRA). It's between 66 and four months and age 67. You receive your primary insurance amount (PIA) if you start your checks at exactly FRA. But you also have the option to claim benefits before or after it. Doing so will result in your primary insurance amount being adjusted.
If you start your benefit before FRA, a monthly early filing penalty applies. It's 5/9 of 1% for each of the first 36 months and 5/12 of 1% for every month prior to that. So if you claim your benefit at 66 with an FRA of 67, you'd face 12 months of early filing penalties totaling 5/9 of 1% each. That would result in a 6.7% benefits reduction. But if you started checks at 62 with an FRA of 67, you'd face 36 months of penalties that reduce your benefit by 5/9 of 1% and an additional 24 months of penalties that reduce it by 5/12 of 1% per month. This would add up to a 30% reduction in benefits.
If you opt to wait until after FRA, on the other hand, delayed retirement credits can be earned each month until 70. These raise your primary benefit by 2/3 of 1% per month. For each year you wait, you get 12 months of credits, which adds up to an 8% annual benefits increase.
You'll want to know both your FRA as well as how early filing penalties and delayed retirement credits work so you can decide if you want to put off starting your benefits in exchange for a bigger check.
2. So does your income over the course of your career
So now you know that your age when you claim benefits affects your primary insurance amount, aka your standard benefit. But you also need to know the secret of how your PIA is calculated.
it's actually based on average income. The Social Security Administration adjusts your wages for inflation, determines the average amount you earned, and gives you benefits equaling a specific percentage of your average wage. You will get benefits equal to:
- 90% of income up to a "bend point" (an income threshold that changes annually).
- 32% of income between the first bend point and a second one.
- 15% of income above the second bend point.
A quick look at this formula shows that lower earners receive benefits equaling a larger percentage of total income. Higher earners, on the other hand, see less of their pre-retirement money replaced. And, there's actually an upper income limit, called the "wage base limit," that applies each year. Anything earned above the wage base limit isn't counted when determining your benefit. So those who earn a lot of money may see Social Security benefits that are very low relative to what they earned each year.
3. The number of years that you work matters as well
Finally, the length of your work history plays a crucial role in determining how big your Social Security check is. That's because the Social Security Administration always takes your 35 highest earning years into account when calculating your average wage. This is true regardless of how long you worked.
If you work many more than 35 years, your lowest earning years won't be included in your benefits calculation. Years when you earned an entry-level salary won't drag down your average, nor will any other years when you just happened to not earn much.
If you work exactly 35 years, though, every year you earned a paycheck will become part of your average wage calculation-- even if your take-home pay was low. And if you haven't even hit 35 years, years of $0 wages become part of your average.
Since you'll want the highest average wage possible when your primary insurance amount is calculated, it can pay off to put in some extra years -- especially if your salary has gone up over time after adjusting for inflation. By working more than 35 years, maxing out your earnings, and being smart about when to get your first Social Security check, you can get a much bigger monthly payment to help you out in your later years.
