If you’re planning to retire, you may be wondering what a good social security payment looks like. The answer is simple: It depends on the age you’re planning to claim.
Benefits increase with age, based on your highest 35 years of earnings. They also are indexed for inflation.
Benefits Increase With Age
There are a few things that you can do to increase your social security benefit. One of them is to delay your retirement benefits past the full retirement age (FRA).
When you delay, you earn delayed-retirement credits for every month that you do not claim benefits. These credits can add 8% to your monthly payment each year, until you reach age 70.
Another thing that you can do to increase your social security income is to start collecting it earlier. This will result in lower payments for the first few years of your retirement, but the benefits will eventually increase.
The biggest issue with taking benefits early is that it means you have a smaller benefit base for cost-of-living adjustments (COLAs) to keep up with inflation. That could be a problem if you are relying on your social security payments to cover expenses like housing, food and health care in retirement.
They’re Based On Your Highest 35 Years Of Earnings
When you get Social Security benefits, your payment is based on your highest 35 years of earnings. These wages are then indexed to inflation, which gives you an income equivalent to the buying power of your salary in today’s economy.
The government also uses a formula to calculate your primary insurance amount (PIA), which is how much you would receive if you started receiving benefits at full retirement age, or FRA for those born after 1960.
You may see a higher benefit if you choose to work part-time while you’re still working, replacing one of your zero-income years with a higher income year.
However, you can expect a lower Social Security benefit if you start claiming your retirement benefits before you reach your FRA, or if you have more than 35 years of employment history. That’s because the Social Security Administration includes a number of years with no income in your PIA calculation, called “elapsed years.”
They’re Indexed For Inflation
During times of high inflation, Social Security recipients receive automatic cost-of-living adjustments (COLAs) that boost benefits. These increases are much-anticipated and are usually fairly significant.
This inflation-adjusted benefit is a key reason for maximizing retirement income through strategic claiming, and clients should be aware of how it’s calculated.
The COLA is based on the percentage increase in the consumer price index for urban wage earners. This index measures spending by urban residents, so it doesn’t take into account changes in buying habits that occur when prices are high.
Because of the difference between the CPI-W and the CPI-U, and because of the limited 3-month period assessed for Social Security indexing, the COLA typically moves above and below the tax parameter percentage increase. But in the long run, this difference should be small and even permanent.
They’re Not Guaranteed
Social Security benefits are not guaranteed and can change or be cut at any time. That’s because the program is a means-tested federal government benefit that relies on an individual’s income and assets to receive benefits.
This makes it possible for the government to reduce, eliminate or even stop benefits if a person’s earnings or assets exceed certain limits set by law. It also makes it more difficult for a person to save money in a way that could help them avoid receiving cuts to their benefits.
Fortunately, there’s a way to protect your future retirement income. The Social Security Administration is working to establish a private account that allows younger workers to invest a portion of their Social Security taxes in a way that is legally protected. It would be owned by the worker, and when that person dies, it can pass to his or her family. This option would help protect retirees from benefits cuts.
