How to maximize your Social Security benefits
The earnings record from a sample Social Security statement.
Social Security Old-Age benefits (also known as Retirement benefits) are the most common of the various benefits provided by the Social Security system. (In this article I will refer to “Benefits”, by which I mean Social Security Retirement benefits.)
Retirement benefits are designed to replace between 20% to 90% of your earnings during your working years. The percentage of earnings replaced varies based on the amount your lifetime earnings; lower earners have a higher percentage of their earnings replaced by Social Security. An average earner (approx. $60,000 in 2024) can expect to have 40-50% of their earnings replaced by Social Security.
This article will detail how benefits are calculated, discuss ways for you to maximize your benefits, and list other forms of income available to you in retirement.
How your Benefits are funded and calculated
“Your Benefit amount is based on your highest 35 years of wages and can be increased or decreased by delaying benefits or claiming benefits early, respectively.”
Social Security benefits are funded by payroll tax. Specifically, you and your employer each pay 6.2% of your wages - up to the “wage base” of $168,600 - as Social Security tax (if you’re self-employed, you pay both portions, or 12.4%). This amount is deducted from your paycheck, and you never see it, but the Social Security Administration (SSA) keeps a record of it, which you can see on your Social Security statement along with your annual earnings for your lifetime to-date.
Social Security tax is charged against all earned income up to the wage base, which in 2024 is $168,600. Above that cap, you are not taxed and your earnings do not count in your Benefit calculation.
Because of inflation - the average wage in 2022 is three times higher than in 1990 - your historical earnings are increased (or “indexed”) to be comparable to today’s dollars. Once your earnings record has been indexed for inflation, you take the average of your highest 35 years, divided by 12 (months), to get your Average Indexed Monthly Earnings (known as AIME or “monthly earnings”). If your earnings record has less than 35 years, the SSA will include the years with $0 earnings when computing your average.
The next step is to compute your monthly benefit at Full Retirement Age, known as Primary Insurance Amount (PIA). The PIA formula has bend-points meant to favor workers with lower monthly earnings - the Social Security system was designed primarily to keep people out of deep poverty. Consequently, the higher your AIME, the lower percentage will be returned to you in Benefits.
The bend points change slightly every year. For those born in 1962, your PIA is the sum of:
90% of your first $1,174 of AIME
32% of your AIME over $1,174 and below $7,078
15% of your AIME above $7,078
A quick example: Someone with AIME of $5,000 (implying annual wages of $60,000, near the national average) would have a PIA of $2,280.90:
$2,280.90 PIA on $5,000 AIME is a 45.6% replacement ratio.
Your PIA represents your benefit amount at your Full Retirement Age (FRA), but there is still one more piece to the formula: deciding when you begin receiving benefits.
The SSA will increase your benefits for every month you delay claiming after your FRA, up to age 70. The monthly increase is 8/12 of 1%, or 8% per year. So, if your FRA is 67 and you delay claiming until 70, your monthly benefit will be 24% (8% × 3 years) higher than your PIA.
The SSA will decrease your benefits if you claim between age 62 and your FRA (between 66-67, depending on your birth year). The formula for benefit reduction is complicated and is approximately 6% per year. If your FRA is 67 and you claim at 62, your benefit will be 30% less than your PIA.
Social Security retirement benefit calculation in four sentences:
Start with your earnings record, indexed for inflation.
Calculate the monthly average (AIME) of the highest 35 years, including zeroes if you worked less than 35 years.
Your AIME is run through the PIA formula to determine your benefit at Full Retirement Age (FRA)
PIA is increased or decreased depending on whether you file after or before your Full Retirement Age.
How to increase your benefits
You can increase your benefits by waiting to claim your benefits and/or by increasing your earnings that are subject to Social Security tax.
Delay collecting benefits as long as possible
As I mentioned above, each month you delay claiming your benefits will significantly increase your monthly amount – though delaying past 70 will not increase your benefits.
Delaying benefits can be a good idea, but it’s not without downsides. You must consider the benefit of an increased lifetime payment against the risk of premature death. You also need to consider other sources of income available should you delay your benefits (more on that later).
Increase your earnings
Another way to increase your benefits is to increase your earnings, particularly if you currently have less than 35 years of earnings on your record, as every dollar you earn will be included in your AIME calculation. If you already have 35 years of earnings, each additional year will simply replace your 35th-highest year, which will have a smaller impact on your AIME.
If you are a business owner taxed as an S-Corp, you have flexibility regarding how much you pay yourself in wages as opposed to profit distributions. Wages (up to $168,600 in 2024) are taxed for Social Security and included in your earnings record, but profit distributions are not. This is a matter best handled between you and your accountant, but be mindful that the strategy to pay yourself the smallest wage possible has a big impact on your Social Security benefits.
Other sources of income
If you are delaying collecting your benefits, or even if you are claiming benefits but want or need extra income, there are a few ways to do it.
Many public sector employees have access to a pension which pays a monthly benefit for the rest of one’s life. You may be able to collect this pension while letting your Social Security benefits grow.
Depending on your age, you may also have access to retirement accounts. IRAs are accessible without penalty beginning at age 59 ½. Qualified plans, such as a 401(k) may be tapped penalty-free if you left your job during or after the year in which you turned 55.
Finally, if you are physically and mentally able (and if you so desire), you can work part-time during retirement. I know seniors who have worked at grocery stores and golf courses, and there are many more jobs available. Find a job that makes you happy! There’s no sense in spending your golden years being miserable at a part time job.
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