Social Security checks help retirees to fund their postwork life. But while most people rely on Social Security during their senior years, far too many don't understand how these benefits are determined or what causes their checks to shrink or grow. This can be a big problem, as actions you take could affect the amount of your checks for the rest of your life.
Fortunately, you can learn about five key factors that affect your benefits, and -- depending on your situation -- you might even be able to take steps now or in the future that result in larger checks.
1. How much you earned
The Social Security benefits formula gives you benefits equal to a percentage of your average earnings after adjusting wages for inflation -- referred to as AIME.
Your standard benefit amount equals 90% of this average wage up to a certain income limit; 32% of income up to a second limit; and 15% of income above that amount. The income limits change annually.
Since higher earnings equal bigger benefits, it pays to try to boost your income when given the opportunity during your working years. Negotiating your salary when you start a job and negotiating annual raises can help.
2. How long you worked
When the Social Security Administration calculates average earnings, it takes into account exactly 35 years of inflation-adjusted earnings. If you have more than 35 years of earnings, only the years when you earned the most count.
This means anyone who hasn't worked for 35 years will have some years of $0 in wages included as part of their average. If you've put in fewer years, you'll end up with a lower benefit.
It also means that if you're earning a lot of money late in your career, you might want to work longer. By doing so, you replace some years of low wages with years of higher earnings and raise the average wage used to determine your benefit.
3. At what age you claim benefits
Every Social Security beneficiary has a full retirement age designated by law. This age is between 65 and 67 depending on your birth year. Claiming at your FRA means you'll receive your standard benefit amount, as determined by the formula explained above.
If you claim before your FRA, your monthly checks will be less than the standard benefit. Your benefit is reduced by 5/9 of 1% per month for each of the first 36 months that you claim prior to hitting your FRA. When you retire more than three years early, an additional 5/12 of 1% early filing penalty applies for each prior month.
Those who claim after FRA, on the other hand, receive an increase in their monthly benefits for each month of delay. This bonus equals 2/3 of 1% per month or about 8% per year. You can earn this increase up until the age of 70 when the bonus for waiting maxes out.
Retirees looking for larger checks should wait as long as possible to claim their benefits, while those who would rather start getting paid ASAP need to be aware their checks will be smaller.
4. Whether you claim on your own work record or your spouse's
If your current or former spouse significantly outearned you, you might get a larger benefit by claiming on his or her work record instead of your own.
Those who are currently married as well as surviving widows and widowers are generally eligible to claim benefits on a spouse's work history, as are divorcees who were married for at least a decade.
Unless you've been divorced at least two years or your current partner has passed on, you will not be able to claim on your partner's work history until your husband or wife claims his or her own benefits. Your benefit amount also depends on your age and your partner's age at the time you claim benefits, with early claiming resulting in a benefits reduction.
5. Whether you continue working while receiving benefits
If you work while receiving your Social Security checks, you could see smaller checks -- unless you've already reached your FRA.
Those who haven't yet hit their FRA can earn up to a certain annual limit before benefits are affected. The limit changes each year and is much higher if you'll hit your FRA at some point during the year you're working.
You can learn more about the income limit and how much your benefits could be reduced by your earnings in this guide to working while on Social Security.
Now you know some key factors that determine your benefit amount
Understanding the Social Security benefits system is essential so you can be smart about when you start claiming your benefits. Now you know how your work history, decision to work as a senior, and age at which you claim benefits can affect the money you receive as a retiree. Understanding how the SSA calculates your benefit amount will allow you to make more informed choices about maximizing the Social Security income you'll depend on in your golden years.