The Social Security formula for retirement benefits is a bit complex, but the basic idea isn't too difficult to understand. The basic idea is that the Social Security Administration (SSA) keeps track of how much you earn each year from employment. When you retire, each year's earnings, up to the annual Social Security taxable maximum, are indexed for inflation. Your 35 highest-earning years are then taken into consideration.
These 35 years of inflation-adjusted earnings are then averaged and divided by 12 to produce your average indexed monthly earnings, or AIME. This is applied to the benefit formula in effect for the year in which you become eligible for Social Security to determine your primary insurance amount (PIA), which is the Social Security benefit you'd get if you claim at your full retirement age. This can range from 66 to 67 years of age, depending on when you were born.
Americans are allowed to claim Social Security at any time between ages 62 and 70. Claiming before reaching full retirement age will permanently reduce your benefit, while waiting longer than full retirement age will result in a higher benefit.
You can read more about the Social Security Benefit Formula in our Social Security guide, but that's the basic method the SSA uses to determine your monthly checks.
How to increase your Social Security benefit
Now that you've read about the methodology used to determine your benefit, the key takeaway is that there are only a few ways to increase your Social Security retirement benefit:
Earn more money while you're still working
Each year, the Social Security Administration sets a taxable wage cap. For context, the 2022 limit is $147,000. Anything earned above this threshold isn't subject to Social Security tax. The important point is that if you're earning less than the taxable wage limit, any increase in earnings can help boost your Social Security benefit in retirement.
Increasing your income is easier said than done. But if you can manage to increase your income, not only will you have more money to save for retirement and enjoy your life in the meantime, but your Social Security work record will also have a higher number to factor into the average. This can take several forms. If you feel you're underpaid, maybe ask for a raise or look for a job that pays what you're worth.
Or you could pick up a side hustle. There have never been more options for people who want to earn extra money, such as ride-sharing services, grocery delivery, and the millions of freelance opportunities on platforms like Upwork (UPWK -1.22%) and Fiverr (FVRR 2.77%).
Wait longer to claim Social Security
As mentioned, the window for starting Social Security benefits begins at 62 and lasts until age 70. And the longer you wait, the higher your monthly benefit will be.
Consider this. If you were born in 1960 or later, your full retirement age for Social Security is 67. By claiming at 62 -- which happens to be the most common age at which Americans actually claim their benefits -- your monthly benefit will be 30% lower than if you had waited until full retirement age. Conversely, waiting until age 70 would result in a permanent increase of 24% in your checks.
You don't need to delay your retirement by years in order to have a meaningful effect. The adjustments are done on a monthly basis, so even waiting for a few extra months to claim your benefit can make a significant difference.
If you haven't worked for 35 years in Social Security-covered employment, work longer
The SSA considers your 35 highest-earning years when determining your initial monthly benefit. If you've worked for fewer than 35 years, zeros will be factored into the formula for the missing years. Not surprisingly, this can be a major drag on your monthly benefit. So, if you haven't reached 35 years yet, waiting a little longer to claim can have a double benefit -- it can increase your monthly benefit for delaying Social Security, and increase your average monthly earnings that determine your primary insurance amount.
How much should you expect from Social Security?
If you're still years away from retirement, it's impossible to say exactly how much you'll get. Your work history isn't complete yet. There's no way to know what inflation will do between now and your retirement, and the benefit formula that will be in effect when you become eligible hasn't been revealed yet.
Having said all that, you can get a good ballpark estimate based on your work history to date by registering for a mySocialSecurity account at www.ssa.gov, if you haven't done so already. On this portal, you'll be able to view your latest Social Security statement and see an estimate of your retirement benefit at different claiming ages.