Social Security benefits are often a key component of retirement income for many Americans. But navigating the rules and formulas behind Social Security can be tricky. Understanding how your monthly payments are determined can help you make informed decisions about when to retire and how to maximize your benefits.

The Two Main Factors That Affect Your Social Security Benefit

There are two major factors that influence the size of your Social Security check: your average monthly earnings and the age at which you claim your benefits. Let’s break these down.

1. Average Monthly Earnings

The amount of money you earned during your career plays a significant role in determining your Social Security benefits. In general, Social Security benefits are designed to replace about 40% of your pre-retirement income. However, the actual amount you will receive is based on your Average Indexed Monthly Earnings (AIME), which is calculated by adjusting your earnings over the years for wage growth and inflation.

AIME is determined by:

• Adjusting your lifetime earnings for inflation using wage growth data
• Calculating the average of your highest-earning 35 years of work

If you have worked for less than 35 years, the missing years are considered to be $0 earnings, which could lower your AIME and, consequently, your benefits. On the other hand, if you continue to work into your later years, you can increase your AIME by replacing lower-earning years with higher-earning ones.

Once your AIME is calculated, you will receive benefits based on specific income thresholds, also known as “bend points.” Here’s how your benefits are broken down:

• 90% of AIME up to the first bend point
• 32% of AIME between the first and second bend point
• 15% of AIME above the second bend point

Each year, the bend points are adjusted for inflation, so the specific points that apply to you will depend on when you turn 62.

2. Your Claiming Age

The age at which you decide to claim Social Security also has a major impact on your benefits. While you can begin receiving Social Security as early as age 62, your benefit will be reduced if you claim before reaching your Full Retirement Age (FRA), which is 67 for anyone born in 1960 or later.

If you decide to claim early, you will face monthly penalties, reducing your benefit by 6.7% for each of the first three years you claim before FRA, and 5% for each additional year you claim earlier. For example, if you claim benefits at 62, five years before your FRA, you could lose up to 30% of your monthly benefit.

On the flip side, if you delay your benefits until after FRA, your monthly payment will increase thanks to delayed retirement credits. These credits give you an 8% annual increase in your benefits for each year you wait, adding up to a 24% increase by the time you claim at age 70.

The Bottom Line: Timing and Earnings Matter

By understanding how both your earnings and claiming age affect your Social Security benefits, you can make smarter decisions about when to retire and how much income you can expect. If you’re aiming to maximize your benefits, the key is to work for at least 35 years and consider delaying your claim until after your FRA.

Take Charge of Your Retirement

The earlier you start planning for retirement, the better. If you want to make sure you’re on the right track, connecting with a financial advisor can help. Retirement planning doesn’t have to be complicated—just take it one step at a time!

Disclaimer – Our team has carefully fact-checked this article to make sure it’s accurate and free from any misinformation. We’re dedicated to keeping our content honest and reliable for our readers.