This article was updated on April 13, 2018, and originally published on March 19, 2016.
Social Security provides a critical source of income for retirees, so if you're approaching retirement, knowing how much you and your spouse can expect to receive in Social Security benefits is smart. Although the amount of money that couples receive in Social Security income varies depending on work history, income, and when couples begin receiving payments, the average retired couple is receiving $2,340 per month in 2018, according to the Social Security Administration.
Are you likely to get this much money, too? Read on to learn how Social Security calculates its payment, and what you should do to maximize your benefit.
First, a quick bit of background
Many Americans approach retirement thinking that Social Security is a savings account that's similar to a retirement account, such as an IRA or a 401(k) plan. It isn't. Social Security is a pay-as-you-go system, and that means that the payroll tax you pay today covers the cost of current Social Security recipient's benefits, not your future benefit.
While Social Security accounts for 90% or more of income for about one-quarter of married retirees, the system was never meant to provide the lion's share of a retired couple's income. Instead, Social Security is supposed to act as a safety net. As such, it replaces about 40% of the average recipient's pre-retirement income.
How's it calculated
Now that we've covered those points, let's dig into the calculation Social Security uses to determine how much money you can receive in benefits in retirement.
First, Social Security uses a complex formula that converts income earned during your 35 highest-earning working years into today's dollars. Then, those adjusted incomes are added together and divided by 420 -- the number of months in 35 years -- to get an average monthly earnings number. That average monthly earnings number is then broken into chunks, and multipliers are used to calculate your monthly benefit at full retirement age, or the age at which you can claim and receive 100% of your benefit (more on that in a bit).
For example, a person who was born in 1956 would multiply the first $895 in indexed monthly earnings by 90%, any amount between $895 and $5,397 by 32%, and any amount above $5,397 by 15%. Once those calculations are done, the resulting numbers are added together and rounded down to the nearest dollar. That sum is a person's estimated monthly retirement benefit at full retirement age.
This formula is used to calculate benefits for the primary recipient, but it's also the number used to calculate a spouse's benefit, too. Generally, a spouse retiring at full retirement age can receive half of the amount that the primary recipient would receive at their full retirement age. If the spouse claims early, then the amount they receive is reduced.
For example, if a spouse born in 1960 claims benefits two years before their full-retirement age, they'd receive 41.67% of the primary recipient's benefit. It may also be helpful to know that, if a spouse's own work history results in a higher Social Security payment than the spousal benefit, then the spouse would receive their own benefit, not the spousal benefit. Sorry -- no double-dipping!
Admittedly, these calculations are complex, so the Social Security Administration provides a handy calculator that allows married couples to estimate their benefit. Alternatively, individuals can create a user ID and log into Social Security online to find out their specific benefit.
Maximizing your Social Security income
In the past, couples could use a file-and-suspend strategy to increase their overall Social Security income. This strategy involved the primary worker and the spouse claiming Social Security at full retirement age. Then, the primary worker would suspend his or her payments so that they could earn delayed benefit credits that are awarded to people who wait to receive Social Security until after they've reached full retirement age.
Unfortunately, this "loophole" closed at the end of March 2016, but there are a couple of options that can still help couples boost their Social Security income.
First, because Social Security uses the highest 35 years of income to calculate average monthly adjusted earnings, it may benefit couples to work a year or two longer. If a filer's work history includes more than 35 years, then every year worked at a higher income eliminates a low-income earning year, thereby boosting a person's monthly benefit.
If that's an unpalatable option (and trust me, I understand), and you have other sources of retirement income, then it might be worth delaying Social Security. Claiming at age 62, the earliest age possible, results in income that is less than you'd receive at your full retirement age (age 66 and 4 months in 2018); but if you were born after 1943, you can get an 8% yearly increase to your benefit for every year that you delay, up to age 70. Unfortunately, delaying until 70 won't increase your spouse's benefit because the spousal benefit will always be based on your full retirement benefit amount, but delaying could still be your best optionforo receiving the biggest payment possible from Social Security as a couple.