If you're like most Americans, Social Security benefits will make up a big chunk of the income you have to live off during retirement. The federal program has a lot of tricky details, so it's important to understand how the Social Security Administration (SSA) determines the amount of your benefits -- particularly because certain decisions you make will permanently impact your benefits.

Unfortunately, far too many retirees simply claim Social Security ASAP without fully understanding the implications of this choice. Before you decide when to claim your benefits, you need to get informed about these three big things so you can make a strategic choice that gives you the best chance of getting the retirement income you need. 

Social security card sitting on top of money

Image source: Getty Images.

1. How is your benefit determined?

The amount of Social Security benefits you receive is based on your work history, both years and earnings.

The SSA considers your wages over the 35 years during which you earned the most money, up to the annual payroll tax cap. There's a tax cap because there's also a limit on how much you can receive in benefits.

Your wages over your 35 most profitable years are adjusted for inflation, added together and then divided by 420 months (the number of months in 35 years). This calculation gives you a figure called average indexed monthly earnings, or AIME.  Then, the SSA uses a formula to determine your primary insurance amount, based on your AIME. For 2019, your primary insurance amount equals 90% of the first $926 of AIME, plus 32% of AIME above $926 and below $5,583, plus 15% of your AIME above $5,583.

The income threshold at which you get a smaller percentage of AIME is called the "bend point." Bend points change annually, but the bend points that determine your benefits are those in effect when you turn 62, regardless of how old you are when you retire. 

Understanding this formula is important for one big reason: The SSA considers the most profitable 35 years of your life, based on your earnings. So, if you worked fewer than 35 years, the SSA will still look at 35 years worth of work history -- and factor in $0 annual earnings for the years you didn't work. These zeroes can significantly reduce your AIME, which in turn substantially drags down your benefit amount. 

For this reason, you might consider working a few more years if you don't have 35 work years on your record. Or, if you're earning much more now than you were at the start of your career, you may decide to stay on an for a few extra years so your early lower earning years are replaced your later high-earning years, when you were in the prime of your career.

2. How does your age affect your Social Security benefits?

The SSA's benefits formula is used to determine how much income you'll receive if you retire at full retirement age (FRA). FRA varies depending when you were born. If you were born after 1960, FRA is 67.

If you start claiming benefits before reaching your FRA, you'll see your benefits reduced by 5/9 of 1% for each of the first 36 months before FRA. If you take benefits even earlier, they will be reduced by an additional 5/12 of 1% for each prior month.

But if you delay claiming your benefits until after your FRA, you can earn delayed retirement credits until you reach 70 years of age, where this bonus maxes out.For each month you delay until 70, you'll earn a benefits increase of 2/3 of 1%. 

This reduction means claiming early can lead to a pretty substantial drop in benefits. Conversely, claiming later will dramatically increase your benefits. This chart shows what will happen to your benefits based on when you retire, assuming your FRA is 67. 


Change in Benefits Compared to FRA


30% reduction


25% reduction


20% reduction


13.3% reduction


6.7% reduction


No change


8% increase


16% increase


24% increase

Losing up to 30% of your potential monthly income by claiming benefits before age 67 could mean a big reduction in your standard of living -- especially because the reduction in benefits is permanent and any future Social Security raises are based off this lower starting benefit amount.

3. How do spousal benefits work?

The final thing to know before deciding when you'll claim Social Security benefits is that the SSA has special rules for spouses. In particular, spouses can claim benefits on each other's work records and may also be entitled to survivors benefits once one spouse passes away. Because of these rules, the decisions you make on Social Security could affect your spouse, too. 

If you claim your benefits early when you have more earnings than your spouse, you could end up permanently reducing the amount your spouse is entitled to in survivors benefits, if you pass away first. On the other hand, if you're the lower-earning spouse, you could potentially get a higher benefit by claiming on your spouse's work record rather than your own.

The rules for spousal benefits are complicated. Here's a complete guide to Social Security spousal benefits for 2019 to help you make the right decision for your family. Make sure you understand the rules before you claim, and don't assume the Social Security Administration will help you maximize your benefits. A report from the Inspector General found SSA staff ended up causing widows and widowers to lose out on as much as $132 million in potential benefits by giving them bad advice when it came to claiming survivors benefits. 

Make sure you understand Social Security rules

As you can see, deciding when to claim Social Security isn't always easy. But if you know the rules for spousal benefits and understand how your benefits are calculated, you can make a fully informed choice. Taking the time to learn about your benefits is essential so you can be smart about maximizing your income as a retiree. You'll thank yourself later.