As retirement comes into focus, it is important to have a clear plan for your Social Security Retirement benefits, a significant source of retirement income. There are two primary ways you can increase individual benefits.
Before I get into the planning ideas, I want to provide a little background on how you qualify for benefits and how they are calculated. To be eligible for retirement benefits, you need to have 40 quarters of credit. A quarter of credit is received for any calendar quarter that you have earned income of $1,360 (2019) in a job that pays Social Security taxes on your earnings. You do not have to earn your income equally over the year. If you earn $5,440 for a calendar year, you will receive credit for four quarters.
Next, your benefit calculation starts with your Average Indexed Monthly Earnings (“AIME”). This is the average of the highest 35 years of earnings (indexed for inflation). Add up your annual earnings and divide by 420 to get your AIME. This figure is used to calculate your Primary Insurance Amount (“PIA”) which is your Social Security retirement benefit. To calculate your PIA, bend points are applied to the AIME. Bend points break your AIME down and apply a percentage to each segment to calculate your PIA. A higher portion of the first income earned is provided to help those with lower income replace a larger amount of income in retirement.
Example:
AIME = $6,500
1st $926 x 90% = $833
Next $4,657 x 32% = $1,490
Next $917 x 15% = $138
Total PIA = $2,461
When we discuss Social Security planning with our clients, we help them understand how working longer will impact their Social Security retirement benefits. There will be an increase from working longer and replacing early, lower-wage calendar years with current, higher-earning calendar years. The impact of the extra years varies based on the difference between earnings early in your career vs current and expected earnings. Also, the number of extra years you plan to work will impact the result. For example, working one extra year with a history of earnings increasing with inflation may provide a $40-$50 increase in monthly benefits. For our clients with significant current salaries, working a few extra years can increase their benefits by $200 or more per month.
A second way to increase your Social Security retirement benefits is to earn Delayed Retirement Credits. These are earned by delaying the start of your retirement benefits beyond your Full Retirement Age (“FRA”). If your FRA is age 66 and you waited until age 70 to start your benefits, your benefits would be 132% of your original benefits. While starting your benefits later result in a higher benefit amount, starting earlier will reduce your benefit by about 7% per year prior to reaching your FRA. The earliest you can begin to receive benefits is age 62.
There are many variables to consider when making this important decision. Getting started early will enable you to consider all the options and evaluate which strategy is best for you.
Not associated with or endorsed by the Social Security Administration or any other government agency.