Social Security provides a guaranteed source of monthly retirement income. That's especially comforting when so many people are still out of work and unable to save for their futures. But how much you get from the program is largely up to you.
As the COVID-19 pandemic raises concerns about the future, 63% of people believe optimizing their Social Security benefits is more important than ever, according to a recent Nationwide survey. If you're unsure how to do that, here are a few tips to get you started.
1. Work at least 35 years
The Social Security Administration calculates your benefit by looking at your average indexed monthly earnings (AIME) -- your average monthly income, adjusted for inflation -- over your 35 highest-earning years and applying the Social Security benefit formula. You can claim benefits as long as you've worked at least 10 years, but those who work fewer than 35 years will have zero-income years factored into their calculation that will reduce their benefit.
To illustrate the effect this can have, consider someone who earned $50,000 per year, adjusted for inflation, for 35 years. You calculate their AIME by dividing their total income over those 35 years ($1.75 million) by 420 (the number of months in 35 years) to get $4,167. But if that person only worked 34 years, their income over the 35-year time frame would only be $1.7 million. You'd still divide that amount by 420 months and you'd end up with an AIME of $4,048.
Working fewer years will have an even more significant impact on your benefits, while working longer than 35 years can increase your benefits because your higher-earning years will replace your lower-earning years.
2. Boost your income now
Increasing your income today will also help raise your AIME and consequently, your Social Security benefits. That might be easier said than done right now, but you can explore side hustles as an additional source of cash or use your time away from work, if you're laid off or furloughed, to learn new skills that will make you a more valuable employee in the future.
When you are working again, talk to your employer about what you can do to get a promotion or request a raise if you feel your performance merits it. Not only will this help your Social Security benefits, but it will also give you more money to spend now or put toward retirement.
Unemployment benefits don't count toward your AIME because you don't pay Social Security taxes on these funds. It can still be a valuable source of money right now, but you'll need to rely upon other sources if your goal is to increase your Social Security benefits.
3. Choose the right starting age
The Social Security benefit formula calculates your benefit at your full retirement age (FRA). This is somewhere between 66 and 67, depending on your birth year. If you don't claim at this age, the Social Security Administration applies another formula to determine how much it will increase or decrease your check based on your age.
Starting benefits before your FRA reduces your checks. You can begin as early as 62, but then you'll only get 70% of your scheduled benefit per check if your FRA is 67, or 75% if your FRA is 66. Delaying benefits past your FRA increases your checks until you reach the maximum benefit at 70. This is 124% of your scheduled benefit per check for those with an FRA of 67, and 132% for those with an FRA of 66.
Delaying isn't always the right move. You have to weigh it against your life expectancy. People who don't expect to live much past their 70s will likely get more money out of the program by beginning benefits right away than they would if they held out for larger checks but got fewer of them. Some people also can't afford to delay benefits even if they'd like to because they need Social Security to help them pay their bills, so you must consider all those factors when deciding which starting age makes the most sense for you.
Following the above steps can help you get more out of Social Security, but your checks are likely never going to go far enough to cover all of your retirement expenses, so you still need substantial personal savings of your own. If you can't afford to save anything right now, don't panic. Just make this a priority once you're able to return to work again.