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Social security is a major source of income for most seniors. Unfortunately, 88% of seniors do not understand how their maximum potential social security benefit is determined, according to a survey conducted by Nationwide. If you do not understand how Social Security benefits are awarded – or what you can do to increase them – you risk getting a lot less money than you are eligible for.
To make informed choices about social security benefits, it is important to know the top three factors that determine how much social security income you will receive in your third year. Here are these three key factors.
Source of the image: Getty Images.
1. Average indexed salaries
Social Security uses a specific formula to determine the amount of your monthly check. The key to this formula is the calculation of your average monthly indexed income, or AIME.
To calculate the LImE, the Social Security Administration looks at your career and adjusts your previous earnings to account for inflation using the Average Wage Index (AWI) to rate the L & # 39; magnitude of inflation.
You will not necessarily receive credit for each dollar that you earned because social security caps the amount of your taxable income. For 2019, for example, social security taxes are levied only on income up to $ 132,900. If you earned $ 2 million in 2019, your average income will not be taken into account in determining your average salary during your career. For 2019, the salary adjusted for inflation and included in the calculation of your average would be $ 132,900.
Your benefits are largely determined by your salary. Therefore, earning more now can increase the amount of Social Security benefits you receive as a senior. If you want to get the highest social security benefits possible, look for opportunities to increase your income whenever you can. Negotiating your salary, regularly asking for salary increases, improving your skills, looking for promotions and participating in parallel concerts are ways to increase your income today and increase your potential security benefits. social.
2. Your 35 most profitable years
Social security does not really consider your salary for each only year of work. To determine your AIME, the SSA counts only the 35 years for which you had the highest adjusted benefit of inflation. So if you worked for 42 years, the seven years you had the lowest income are not counted.
Unfortunately, if you have not worked for 35 years, Social Security will not calculate the average salary over the number of years you have held a job. Instead, it takes into account the $ 0 gain for years you did not work when calculating your AIME. For example, if you worked for 25 years, your AIME salary would count on 10 years of earnings, which would significantly reduce the average salary for which you get a credit.
To make sure you do not have a number of years of salary equal to $ 0 in your AIME calculation, try working for at least 35 years. If you earn a lot towards the end of your career, you may also want to work for a few more years so that these new higher wages are taken into account in AIME, forcing the first years of low wages to fall, so that they are not. counted in your AIME at all.
3. Your age when you start applying for benefits
Once your AIME has been calculated, Social Security applies a special formula to determine the amount of your monthly benefits. Your benefits are equal to 90% of your AIME up to a certain income level, called "flex point". Then you get 32% of AIME until the next "bend point" and 15% for any extra income. The flex points change each year based on changes in the average wage index.
This formula determines what your amount of primary insurance is. However, you only recover your principal amount of insurance if you claim benefits at retirement age. If you claim benefits before your FRA, they are reduced. If you apply after your FRA, your benefits are increased because you accumulate deferred retirement credits up to age 70.
If you decide to retire at a different age than FRA, you need to understand the impact this can have on your income to social security. Claiming early compensation reduces the 5/9 benefits by 1% per month during the first 36 months of your retirement before your FRA. If you retire more than 36 months earlier, you lose 5/12% of an additional 1% for each previous month. If you retire at age 62 when the FIU turns 67, the benefits will be reduced by 30%.
However, if you retire later, the benefits increase by 2/3 of 1% per month until age 70, when the bonus for delay is at the maximum. This graph shows the impact that retirement at different ages can have on the total monthly income of Social Security.
Early retirement can significantly reduce your monthly benefits, but that means you will lose years of benefits and expect to live long enough for your monthly benefits to be higher, to make up for any Social Security income you receive. have missed waiting. You can do simple calculations to determine how much time you would have to live to cover your costs to delay the start of your social security benefits.
Maximize your social security benefits
You now know the main factors that affect social security benefits: your wages over the 35 highest years of your career and your retirement age. Knowing this, you will be able to maximize your benefits because you may decide to work a little longer and postpone social security if you want your benefits to be as important as possible.
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