Social Security benefits play a major role in retirement for many older Americans, so it's wise to account for them in your retirement plan.
When you know approximately how much you'll receive in benefits once you retire, it will be easier to determine how much you'll have to save on your own in your retirement fund. Social Security can be complex and confusing at times, though, and more than 90% of U.S. adults age 50 and older don't know what factors impact the maximum benefit amount a person can receive, according to a survey from Nationwide.
There are several factors that affect how much you'll receive in Social Security benefits, and the more you understand them, the better you can prepare for retirement.
How your Social Security benefits are calculated
When determining your basic benefit amount -- or the amount you'll receive if you file for benefits at your full retirement age (FRA) -- the Social Security Administration considers the 35 highest-earning years of your career. Your earnings over those years are averaged and then run through a formula to adjust for inflation, and the result is your basic benefit amount (also called your "primary insurance amount").
While the actual formula to calculate your benefits is quite complicated, the good news is you don't need to understand exactly how to determine your benefits yourself. In fact, to get an estimate of what your future checks will look like, you can check your statements online by creating a mySocialSecurity account. Here you can see your estimated future benefit amount based on your real earnings.
Although you may not need to know how to calculate your benefits yourself, it is a good idea to understand the basics behind the calculation. When you have a better understanding of how your benefits are determined, you can take steps to increase the amount you receive.
For example, because your benefit amount is based on the 35 highest-earning years of your career, it's important to make sure you work at least 35 years before you start claiming benefits. If you don't work that long, you'll have zeros added to your average to account for the years you weren't working -- which will reduce your benefit amount. On the other hand, working more than 35 years can potentially increase your benefit amount because you may be able to replace some of your lower-earning years from early in your career with more recent, higher-earning years. That boosts your overall earnings average, which also increases your benefit amount.
If you're unable or simply don't want to work more than 35 years, you can also increase your benefits by boosting your annual income. Higher earnings will result in a higher average, as well as bigger monthly checks.
The other factor that can significantly affect your monthly checks
Even if you take steps to increase your benefit amount, there's another factor that can impact how much you'll receive: the age you begin claiming benefits.
In order to receive the full benefit amount you're entitled to, you'll need to claim at your full retirement age (FRA). For those born in 1960 or later, your FRA is 67 years old. If you were born before 1960, your FRA is either 66 or 66 and a certain number of months, depending on the exact year you were born.
You can begin claiming benefits as early as age 62, but by doing so your monthly checks will be reduced. If you have a FRA of 67 and file for benefits at 62, your checks will be reduced by 30%. Keep in mind that this reduction is permanent, too -- meaning you won't receive a boost in benefits once you reach your FRA. By waiting until after your FRA to claim, though, you'll receive extra money in addition to your full benefit amount. Those with a FRA of 67 will collect an additional 24% each month on top of their basic benefit amount.
There's no single right answer as to when you should begin claiming, because it will depend on your unique situation. For instance, if you're battling health problems and don't expect to spend decades in retirement, claiming early might be your best option. But if you have reason to believe you'll live a long and healthy life, you may receive more money over a lifetime if you delay benefits. Your decision will also depend on how much you have saved for retirement, because if your savings are sparse, the bigger checks you'd receive by waiting to claim can go a long way.
Maximizing your Social Security benefits is a smart retirement strategy, and the first step is figuring out what factors influence the size of your monthly checks. By taking steps to boost your benefits, you can set yourself up for a more comfortable retirement.