Most people are counting on Social Security to provide some income in retirement, but how much will you get and what affects the amount? Some important decisions before you start receiving benefits can make a big difference in the amount of Social Security income you’ll receive for the rest of your life.
How are Social Security retirement benefits calculated? Your benefit amount is based on your 35 highest-paid years. The maximum Social Security benefit for someone retiring at full retirement age in 2019 is $2,861 per month (it will be $3,011 per month in 2020).
The calculation is complicated, but the benefits are designed to replace a portion of your average earnings, with a higher percentage for lower-earning workers (replacing as much as 75% of wages for low earners who take benefits at their full retirement age, about 40% for medium earners, and about 27% for high earners). The amount you earned in the past is adjusted based on an index factor, which accounts for inflation.
Only up to $132,900 in earnings count for 2019 ($137,700 in 2020), which is the amount of income that is subject to Social Security taxes for the year. This maximum has risen through the years — it was $76,200 in 2000, for example. Earning more than the maximum in a year won’t affect your benefits.
Other factors can affect your benefits, too. For more information, see the Social Security Administration’s Your Retirement Benefit: How It’s Figured factsheet. Also see Social Security’s Understanding the Benefits booklet.
What decisions can affect my benefits? The age when you decide to start taking benefits makes a big difference in the amount. The “full retirement age” used to be age 65 for a long time, but it has been increasing for the past several years. It’s now 66 for people born from 1943 to 1954, and it gradually increases by two months each year until it reaches 67 for people born in 1960 or later (see Find Your Full Retirement Age for more information).
Regardless of your full retirement age, you can choose to start taking benefits as early as age 62 or delay taking benefits until as late as age 70. The older you are when you start receiving benefits, the larger the annual payouts will be.
If you do start taking benefits at age 62, your annual payouts will be reduced as much as 30% for your lifetime (with the specific reduction amount based on the number of months before your full retirement age).
Or you can choose to delay taking benefits even after you’ve reached your full retirement age — your annual benefits will increase by 8% for every year you delay after full retirement age until age 70. (Delaying past age 70 won’t increase your benefits.)
The Social Security Administration has several calculators that can help you estimate your benefits and compare your options (some are more detailed than others). See Social Security Benefits Calculators and Online Tools.
Will my benefits be reduced if I’m still working when I start receiving benefits?
It depends on whether or not you’ve reached full retirement age. If you start taking benefits before you reach full retirement age, then $1 in benefits will be withheld for every $2 in earnings above $17,640 in 2019 (the amount increases slightly each year; it will be $18,240 in 2020). In the year you reach full retirement age, $1 in benefits will be withheld for every $3 you earn above $46,920 in 2019 ($48,600 in 2020).The earnings test only applies until the month you reach full retirement age — at that point, your earnings won’t affect your benefits.
You don’t lose the money that was withheld forever, however. If your retirement benefits are withheld for several months because you earned more than the limit, then your monthly benefit will be recalculated at your full retirement age and increased to make up for the months when your benefits were withheld because of the earnings test.
After you reach full retirement age, your earnings won’t reduce your benefits. In fact, depending on how many years you’ve worked and how much you’ve earned through the years, working longer could increase your benefits — especially if you hadn’t worked for 35 years. See the How Work Affects Your Benefits factsheet for more information about working and Social Security benefits.
What if I took off many years from work to raise my kids and my spouse earned a lot more than I did?
You’ll either receive the amount based on your own earnings history or you can receive spousal benefits based on your husband or wife’s benefits, which can be as much as 50% of the higher earner’s full retirement benefit. You can start taking spousal benefits as early as age 62, but your benefit amount will be reduced. The calculations can be complicated. See Benefits for Your Spouse for more information.
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