About 90% of Americans 65 and older receive Social Security benefits, according to the Social Security Administration (SSA). It's an important program for older people, replacing about 40% of the income they had before retirement, on average.
But while the overwhelming majority of retirees receive Social Security benefits, the amounts they receive are not one-size-fits-all. The average benefit will be $1,461 per month in 2019. The maximum, however, can be significantly higher, depending upon the age at which you start claiming your benefits, your lifetime earnings, and the number of years you've worked. The maximum Social Security benefit per month rose this year for new retirees, for example, to $3,770 per month -- about 158% higher than the $1,461 average.
Some retirees receive more than the average amount while others receive less. To maximize the Social Security benefits you'll be eligible for at retirement, understand which factors can raise your benefits, and then plan how you'll boost your monthly checks.
1. Your retirement age affects the size of your benefits
Americans become eligible to receive Social Security benefits at the age of 62. But benefits are reduced if you take them before your full retirement age (FRA), which depends on the year you were born. The FRA is 65 for people born in 1937 or earlier. For those born between 1943 and 1954, it's 66. If you were born in 1960 or after, it's 67. It advances incrementally from 1955 to 1959. (To see your FRA, click here.)
If you choose to take Social Security at 62 and your FRA is 67, the amount you'll receive will be 30% lower than it would be if you had waited until 67. While your benefits will be reduced if you start claiming before your FRA, the percentage you forfeit gradually lessens as you approach your FRA. If you take Social Security at 63 rather than 62, for example, the benefit is reduced by 25%. If you wait until you're 64, it's reduced by 20%.
These benefit reductions constitute a significant chunk of change. If retiring at your FRA of 67 would have provided you with a monthly benefit of $1,500, for example, retiring at 62 knocks it down to $1,050. While some people may need to retire before their FRA due to health concerns or because they're stapped for cash, the decision to claim early shouldn't be taken lightly because it means smaller checks for the rest of your life.
Conversely, benefits climb for those who delay taking benefits past their FRA. Benefits rise roughly 8% for every year you delay taking Social Security past the FRA until you reach 70. If your FRA is 67 and you work until you're 70, your benefit can be 24% higher. If you're looking at a $1,500 monthly benefit at 67, you could receive $1,860 per month if you start claiming at 70. This bonus for delaying maxes out at age 70, so if you haven't claimed by then, there's no incentive to keep waiting.
2. A spousal benefit can help a lower-earning spouse
It pays to be aware of spousal Social Security benefits and their potential to hike total benefits. Spousal benefits are available if one spouse was the primary breadwinner and the other earned significantly less, or they didn't work at all. Spousal benefits are calculated on the primary earner's work record and can total as much as 50% of the primary earner's benefit at their FRA.
The lower earner becomes eligible for a spousal benefit at 62, as long as the other spouse is receiving their Social Security benefits. Spousal benefits are reduced if they are taken before the lower-earning spouse's FRA. Note that spousal benefits do not increase if you delay past your FRA.
Let's say you were the primary breadwinner, retired at your FRA, and receive $1,500 monthly. Your spouse raised children full time and never held a job outside the home. That spouse could receive $750 at their FRA. The total Social Security benefits coming into the household would then total $2,250. (The spousal benefit does not affect the benefit amount of the higher-earning spouse.)
But what if both spouses worked? The SSA determines each spouse's Social Security benefit on their own respective work records. If one spouse's benefit is less than 50% of the other's, the one earning less is entitled to a spousal benefit. But if the lower-earning spouse is entitled to 50% or more of the other spouse's benefit, they will collect on their own account.
Let's say both spouses in a couple have an FRA of 67. One is entitled to Social Security benefits of $1,500 and the other is entitled to $500 per month. The lower-earning spouse would be entitled to a spousal benefit of $750 total per month, 50% of the higher-earning spouse's benefit, and would thus receive the $500 on their own work record plus the $250 difference.
But in a couple where one spouse is entitled to benefits of $1,500 and the other $1,000, no spousal benefit would be paid because the second spouse's benefit of $750 exceeds 50% of the higher earner's benefit.
If you're eligible for both Social Security benefits on your own work record and a spousal benefit, there's one further potential benefit maximizer if you were born before January 2, 1954, and you have reached your FRA. You can choose to take only the spousal benefit, thereby delaying taking your own Social Security benefits. This choice allows you to receive the 8% yearly increase in benefits you'd receive by waiting to file until age 70, while still receiving the spousal benefits. But if your birthday falls on or after that date, this option is not available.
3. Your work history and earnings matter
The premise of of the Social Security program is that the amount of benefits you're eligible for is based on your work credits and your earnings over your lifetime.
To become eligible for Social Security benefits in the first place, a worker needs to accrue 40 work credits over their lifetime. The most work credits anyone can receive during one year is four, so the fastest you can reach the eligibility finish line is ten years. This year, folks earn one work credit for every $1,360 they earn. That figure varies each year -- in 2018, it was $1,320, for example -- but generally, just know: For every X dollars of earnings, you earn one work credit toward becoming eligible to receive benefits.
Once you've qualified by accruing 40 work credits, the SSA calculates the amount of your benefits based your earnings history by looking at your 35 highest-earning years, adjusted for inflation. If your work history is shorter than 35 years, the SSA factors in $0 for each year you didn't work, which drags down your average earnings.
So the first Social Security maximizer is to have establish 35 years of work history before you retire. Even a year or more of no earnings in a 35-year span can lower your benefits.
The earnings are calculated on earned income up to the top amount subject to the Social Security payroll tax, which is $132,900 in 2019. Every year's earnings total is then indexed for inflation. After that, the earnings for your 35 highest-earning years are totaled and divided by 420, the number of months in 35 years. The result is called the average indexed monthly earnings (AIME).
Your AIME becomes part of a formula that determines your primary insurance amount (PIA). PIA is the initial Social Security benefit you'll be entitled to receive at your FRA. PIA is based on 90% of a certain amount of your AIME, 32% of another portion, and if you've been a high earner, 15% of the remainder. These percentages remain the same, but the amounts are adjusted every year.
In 2019, the amounts are:
- 90% of the first $926 of your AIME.
- 32% of the amount of AIME greater than $926 but less than $5,583.
- 15% of the amount of AIME greater than $5,583.
The second possible Social Security maximizer? Increase your earnings now as much as possible. A promotion, a high-paying career path, even working a side gig for several years all have the potential to pay off both now and later on.