Retirement planning is a critical aspect of financial stability, and understanding Social Security benefits plays a significant role. For many Americans -- about 68 million according to the Social Security Administration -- that monthly direct deposit is a critical piece of their post-working life income.
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According to the government's most recent annual data -- released in late 2023 -- $1,505 is the average monthly Social Security income for someone age 65. Now, that's just an average. What people actually get depends on a number of variables, particularly lifetime earnings history and the age at which they began receiving the benefit.
You also must consider the tax consequences and your passive income after you begin drawing Social Security. It's critical to fully understand how all these factors affect your Social Security income in order to guarantee that you receive the highest benefit available.
But for now, let's look at what determines what you get in the first place.
Factors influencing your Social Security benefit
One of the most significant factors affecting your Social Security benefit is your average indexed monthly earnings (AIME). This figure is calculated based on your highest-earning 35 years of work. The Social Security Administration (SSA) uses a formula to convert your AIME into your primary insurance amount (PIA), which helps determine your monthly benefit. If you have fewer than 35 years of earnings, zeros are factored in, reducing your benefit.
Then there's the age at which you begin receiving benefits. Even though you can start taking Social Security at age 62, if you claim your benefit before reaching full retirement age (FRA), your benefit will be permanently decreased. Though you'll receive it for more months.
The FRA is 66 for people born between 1943 and 1954, and it progressively rises to 67 for people born in 1960 or after. Delaying claiming your benefit past your FRA -- but only up until age 70 -- will boost your monthly payment. Though you'll get it for fewer months.
Strategies to maximize your benefit
To maximize your Social Security benefit, consider working for at least 35 years to avoid having zero-earnings years impact your calculation. Additionally, increasing your earnings can have a direct effect on your benefit amount.
Postponing your benefit claim can be another successful tactic. Every year you postpone past your FRA, until you are 70 years old, your benefit increases by about 8%. Your monthly income can increase by a few hundred dollars a month or more if you wait, giving you greater financial security as you age. Though you'll have to factor in things like your life expectancy and how soon you need the money to figure out if delaying and receiving your benefit for fewer months overall makes sense.
Will average work for you?
While figures change monthly, the average monthly Social Security retirement benefit is around $1,900 per month, or roughly $22,800 per year. That's not a ton of money, depending on where you live and what expenses you have, so it's essential to consider additional sources of retirement income.
Personal savings, retirement accounts like 401(k)s or IRAs, and other investments can bring you extra money in retirement, and diversifying your income sources reduces reliance on Social Security alone and offers greater financial stability.
Healthcare costs are yet another important factor. Anticipating those expenditures is essential, as they tend to increase with age. Medicare doesn't pay for everything, and it doesn't start until age 65 for most people.
A health savings account (HSA) or supplemental insurance can help fill in the gaps and make sure you're ready for future medical expenses.
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Today is the time to plan for tomorrow
Online sources abound for calculating your potential Social Security income, but even so it can be complicated. Creating your free personal account with the Social Security Administration can be a great step to see what's in your future. It might also make sense to consult with a qualified tax professional and/or financial advisor.
