Social Security benefits are likely going to be an important source of funds for you when you are no longer getting a paycheck. Most retirees rely on them to provide at least some of their income in their later years. Because of that, it's important to understand how much money you are likely to get from the Social Security Administration when it comes time to collect.
So, how much money will you get from Social Security? Here's what you can expect.
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Benefits are based on a percentage of your average wage
The first key factor that determines how much money you get from Social Security is the wages you earned throughout your career. The Social Security Administration collects data on your earnings each year, and this information becomes part of your earnings record. When it comes time to retire, the SSA adjusts your wages for inflation and determines your 35 highest-earning years.
The SSA then calculates your average wage over those 35 years, and you receive a monthly benefit equal to a specific percentage of the average amount you earned each month during the relevant years. The percentage is smaller for higher earners, so benefits end up being progressive, with those who earned less receiving a larger portion of their average income.
Since benefits are based on wages throughout the 35 years you earned the most, increasing your earnings -- especially early on -- can result in a larger payment as a retiree. On the other hand, working less than 35 years will shrink your benefits, as will retiring when you're at peak earning power, since the more years you work at your higher salary, the fewer lower-earning years will be included in the 35 that are used to calculate your benefit.
Ultimately, your Social Security check will end up replacing around 40% of your average wages, which means that you are very unlikely to be able to live on these benefits alone without having some money from savings to supplement them.
Your claiming age also affects your benefits
Social Security's benefits formula calculation determines what your primary insurance amount (PIA) equals. Your PIA is available to you if you claim your benefits right at the age that is designated as your full retirement age (FRA). Your birth year determines what your FRA is, although it used to be 65 for everyone. Now, for anyone born in 1960 or later, FRA is 67, and for those born in 1959, it's 66 and 10 months.
You are allowed to claim benefits earlier than FRA. In fact, you can claim as young as 62. However, doing so would result in a reduction in your standard benefit. The reduction is based on how early you claim and equals:
- 5/9 of 1% for each of the first 36 months that benefits are received prior to FRA. This is a total of a 6.7% reduction for each of the first three years.
- 5/12 of 1% for each prior month before then. This is an additional 5% reduction for any prior year.
These penalties add up, resulting in a 30% cut to your standard benefit when you start payments five years early by beginning them at 62 with an FRA of 67.
Those who want to increase their benefits also have the opportunity to do so through earning delayed retirement credits that add 2/3 of 1% to your standard benefit for each month you wait until 70. That adds up to an 8% annual benefit increase. Because these credits can only be earned until age 70, you can increase your benefits by a maximum of 24% if your FRA is 67 and you claim the maximum credits.
Many retirees get higher lifetime benefits, in addition to higher monthly benefits, by delaying their claim until they turn 70. That's because life spans have gotten longer since the rules were created for Social Security, so it's common to outlive the time it takes to break even for a delayed claim. However, you'll need to consider the big picture, including your retirement goals and the amount you have saved, to decide which retirement age makes sense for you.
Now that you know how to determine the amount of money you'll get from Social Security, you can make an informed choice about exactly when to claim and how much your Social Security benefits will provide. With this information in mind, you can make retirement plans that give you the security you deserve.
