Social Security benefits cannot be your sole income source as a retiree in most situations. These benefits are intended to replace about 40% of pre-retirement income, so a substantially reduced living standard would be necessary if you're counting on Social Security alone.
You can, however, rely on these benefits to provide a good portion of the income you need -- if you're smart about where you live and when you claim your benefits. If you are hoping Social Security will bankroll your retirement, here are three steps to take that can help you get closer to making that happen.
Image source: Getty Images.
1. Maximize your AIME
The biggest factor affecting your monthly Social Security benefit is your AIME. AIME stands for Average Indexed Monthly Earnings. The Social Security Administration calculates it by:
- Adjusting wages throughout your career for inflation
- Determining your earnings in the 35 years when your earnings were the highest
- Calculating your average monthly earnings during that 35-year period of time
You then receive benefits equal to a percentage of your AIME, with lower earners getting a higher percentage of AIME than higher earners (since the Social Security benefits system is progressive).
The higher your AIME, the higher your monthly benefit will be. You can increase it by earning more during as many working years as possible, making sure you work at least 35 years so no years of $0 wages are factored into your AIME calculation, and working longer at a higher earning level later in your career so some higher-earning years replace lower-earning years when the calculation is done.
2. Max out your delayed retirement credits
While AIME is the biggest factor determining how large your Social Security check is, your age when you claim benefits also matters.
See, the formula in which you get a percentage of your AIME is used to determine your standard benefit. But you won't necessarily receive exactly that amount, due to delayed retirement credits and early filing penalties. Here's how it works:
- You receive your standard benefit if you claim it at exactly your full retirement age. That's between 66 and six months and 67 if you were born in 1957 or later.
- Early filing penalties reduce your standard benefit for any month you claim it prior to FRA.
- Delayed retirement credits increase your standard benefit for any month you claim it after FRA.
If you're hoping to get as much support as possible from Social Security, maxing out delayed retirement credits makes sense. You can earn them until age 70, so you'd want to try to wait until then to get the highest Social Security check you can access.
3. Choose your retirement location strategically
Remember, Social Security isn't enough by itself to support you, even if you take these steps to max out your benefits. But, if you choose to retire in a location with a low cost of living, your money will stretch further and you won't need as much extra income to supplement your retirement checks.
You should also make sure you don't retire in one of the minority of states that tax Social Security benefits if there's a possibility you'd be taxed on your retirement checks. Since generally only higher earners end up paying these taxes even if their state charges them, this may be a concern only if you'll have significant additional income sources that would put you over the threshold for benefits to be taxed.
If you follow these three strategies, you should be able to maximize the role Social Security can play in funding your retirement.
