Your Social Security checks will probably be a key part of your retirement income when you've stopped working. It makes good sense to understand how these benefits are calculated so you can make smart choices during your working life and in retirement to maximize the income you receive.
Fortunately, there are only two big factors that determine the amount of your benefits. Here's what they are and how you can increase your payments.
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1. The income you earn over your career
How much you earn is the biggest deciding factor in how big your Social Security checks will be. You'll receive benefits equal to a portion of your average income in the 35 years you had the highest inflation-adjusted earnings. The benefits formula is designed to give you around 40% of what you earned, although it's a progressive formula. That means lower earners get a little more, and higher earners get a little less.
Since benefits are based on average earnings over 35 years, no matter how long you worked, there are a few key things you can do to bring your average income up and increase your monthly Social Security payments:
- Try to increase your earnings as much as possible throughout your career. Do this by negotiating the pay you receive when you start a new job, negotiating your pay during performance reviews, improving your job skills and pursuing higher-paying opportunities throughout your career, and considering doing some side jobs to earn extra money.
- Make sure you're happy with the 35 years that count in your benefits formula. If you had some years when you made very little money (especially early in your career or if you were unemployed for part of the year), consider trying to work more than 35 total years so you can ensure those low-earning periods don't count in your benefits formula. The more years you can work at a higher salary, the higher your benefits will end up being.
- Avoid working less than 35 years. If you don't have a full 35-year work history, some years of $0 wages will reduce the average wage your benefits are based on.
Taking these steps will go a long way toward ensuring your benefits are as generous as possible.
2. The age when you claim your benefits
The second big factor that controls the size of your Social Security checks is the age at which you claim benefits. That's because you can raise or lower your standard benefit depending on when you start payments relative to your Full Retirement Age (FRA).
Your FRA is based on your birth year. For anyone born in 1960 or after, it will be 67. For any month you start benefits before your FRA, you see a reduction in your standard benefit. For any month you wait to claim your benefits until after FRA, you will get a delayed retirement credit -- until age 70, when those credits stop.
Because of these credits and penalties, the benefit that is calculated based on your average wages will increase or decrease if you file early or late. The early filing penalties are 5/9 of 1% for the first 36 months you're early and 5/12 of 1% for any month you get a check prior to that time. The reduction adds up to a 6.7% cut to your standard benefit for each of the first three years and a 5% reduction for any prior year. Someone who claims Social Security at 62 with an FRA of 67 will get hit with the maximum penalties, which add up to a 30% reduction.
On the other hand, delayed retirement credits start after your FRA and equal 2/3 of 1% monthly or 8% annually. If you put off claiming Social Security until age 70 with an FRA of 67, you increase your standard benefit by 24%.
As you can see, it's pretty easy to understand these factors that shape the size of your checks. If you aim to earn as much money as possible for 35 years and to earn as many delayed retirement credits as you can, you should be able to get much larger benefit checks. You still probably can't live on Social Security alone, but the income will help ensure you can cover the basics in retirement.
