The Social Security program provided income to 49 million retired workers in May 2023, and a recent survey from Gallup suggests that the vast majority of those individuals depend on monthly benefits to make ends meet. Of course, Social Security is meant to supplement other sources of retirement income -- savings accounts, investment accounts, and pensions -- but benefits tend to become increasingly important as people age.
For that reason, current workers planning for retirement should know what to expect from Social Security and how to increase their future benefit.
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Planning for retirement starts with a few questions
Workers planning for retirement should ask themselves two simple questions. The first is: How much money will it take to retire comfortably? There is no correct answer, but financial planners say anyone hoping to maintain their lifestyle needs to replace about 80% of pre-retirement income.
The second question is: How much income will Social Security provide in retirement? The simple answer is benefits replace about 40% of pre-retirement income, but the precise amount depends on lifetime earnings and retirement age. Workers can estimate their future retirement benefit by creating an account with the Social Security Administration.
Some readers may be unsatisfied with their current trajectory. Fortunately, there are a few ways current workers can increase their future retirement benefit.
Maximize earnings over at least 35 years in the workforce
Social Security retirement benefits are based in part on lifetime earnings. Specifically, a formula is applied to the average, inflation-adjusted earnings from the 35 highest-paid years of a worker's career to determine their primary insurance amount (PIA). The PIA is the benefit payable to a worker that starts Social Security at full retirement age (FRA). Workers that claim Social Security before or after FRA receive a modified sum, as discussed below.
Here's the takeaway: Individuals who spend fewer than 35 years in the workforce are at an immediate disadvantage because a zero is included in the calculation for each missing year. That means workers can increase their future retirement benefit by (1) ensuring they work for at least 35 years, and (2) maximizing their earnings during that time.
The first suggestion is straightforward, but the second leaves some wiggle room. Workers looking to make more money can ask their employers for a raise, look for part-time employment elsewhere, or even freelance through platforms like Upwork and Fiverr.
Delay Social Security benefits beyond full retirement age
Lifetime earnings is one of two variables that affects that amount of income Social Security provides in retirement. The other important variable is the age at which benefits start. Workers who claim Social Security before FRA receive a permanently reduced benefit, and workers who claim Social Security after FRA receive a permanently increased benefit.
There are a few caveats to those rules. First, eligibility for Social Security retirement benefits begins at age 62, so workers cannot claim benefits any earlier. Second, the credit for delayed retirement stops at age 70, so it never makes sense to start benefits any later.
Here's the takeaway: Workers can increase their Social Security payout by delaying benefits beyond FRA, up to age 70. The exact increase depends on how late Social Security starts. Individuals born in 1943 or later get two-thirds of 1% tacked on to their PIA for each month they delay. That means delaying benefits for a full year would increase the payout to 108% of the PIA (i.e., 0.67% multiplied by 12 months), and delaying benefits for two full years would increase the payout to 116% of the PIA.
