Social security is a major source of income for most seniors. Unfortunately, 88% of older adults do not understand how their maximum potential benefit is determined, according to a Nationwide survey. If you do not understand how Social Security benefits are awarded – or what you can do to increase your benefits – you may end up getting far less money than you qualify for.
Taking informed choices about social security benefits, it is important to know the three major factors that determine the amount of income schemes you receive during your senior years. Here are the three key factors.
1. Average Indexed Salary
Social Security uses a specific formula to determine how much your monthly check is. The key to this formula is the calculation of average indexed monthly income, or AIME.
To calculate AIME, the Social Security Administration looks back on your career and adjusts previous earnings to count on inflation using the average wage index (AWI) to assess how much inflation has occurred.
You won't necessarily get credit for every dollar you earned because Social Security cuts the amount of income you're taxed on. For 2019, for example, social security taxes are only collected on income up to $ 132,900. If you made $ 2 million in 2019, you will not have $ 2 million in income when deciding your average wages over your career. Instead of wages adjusted for inflation and included in the average calculation in 2019, it would be $ 132,900.
Your benefits are largely determined by your wages, so earning more now can increase the amount of social security benefits you receive as a senior. If you want to earn the highest possible social security benefits, look for opportunities to increase your earnings at any time. Negotiate your pay, ask to increase regularly, improve your skills, pursue campaigns, and take on side gigs, ways to increase your earnings today and increase your potential social benefits.
2. Your Most Profitable 35 Years
Social Security does not actually see your wages for each single year. When deciding your AIME, SSA only counts the 35 years you had the highest inflation-adjusted earnings. So, if you worked for 42 years, the seven years you had the lowest income do not count.
Unfortunately, if you did not work for a full 35 years, Social Security does not detect the average salary over the number of years you have been working. Instead, there are factors in $ 0 in revenue for the years you didn't work when calculating AIME. For example, if you worked for 25 years, you would have 10 years of income of $ 0 in your AIME, which reduces the average salary you get credit for.
To ensure that you do not end up with a number of years of $ 0 salary included in the AIME calculation, try working for at least 35 years. If you earn much near the end of your career, you may also want to work a few years longer so that these new higher salaries are included in AIME, forcing the first few years of low wages to fall so they are not counted in your AIME at all.
3. Your age when you begin to claim benefits
After AIME is calculated, Social Security uses a special formula to determine how much your monthly benefits will be. Your benefits are equal to 90% of AIME up to a certain income level, called a "bend point". Then you get 32% of the AIME up to the next "bend point" and 15% for all extra income. The bending points change each year based on changes in the average wage index.
This formula determines what the primary insurance amount is . However, you only collect your primary insurance amount if you require full retirement benefits. If you require benefits before FRA, your benefits are reduced. If you claim by FRA, your benefits increase because you earn late retirement credit up to 70 years.
If you decide to retire in a different age than FRA, you need to understand what impact this may have on your social security income. To claim early reduces the benefits of 5/9 of 1% per month for the first 36 months you retire before FRA. If you retire more than 36 months early, you lose an additional 5/12 of 1% for each previous month. If you retire at 62 when your FRA is 67, your benefits will be reduced by 30%.
But if you retire late, the benefits of 2/3 of 1% per month up to 70 years, when the bonus to delay maxes out. This chart shows how retirement at different ages can affect total monthly social security benefits.
Formerly retirees can significantly reduce your monthly performance but leave behind you giving you many benefits and have to hope you live long enough for higher monthly benefits to compensate for any income insurance you missed by waiting to claim. You can do simple math to find out how long you need to live to break even to delay the start of your social security benefits.
Maximizing Your Social Security Schemes
Now you know the major factors that are important for social security schemes: your wages during the highest 35 years of your career and the age at which you retire. Knowing this can help you maximize your benefits, as you might decide to work a little longer and delay your social security if you want your benefit to be as large as possible.