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9 in 10 Americans Don't Know How to Maximize Their Social Security Benefits

Christy Bieber, The Motley Fool

Social Security benefits are an important source of income for seniors. Unfortunately, many Americans have no idea how to maximize their income from the Social Security Administration (SSA). In fact, a survey conducted by Nationwide found a full 92% of Americans couldn't identify the factors that would give them the maximum benefit -- even though 53% claimed they knew exactly what to do in order to get the most income. 

It's not surprising that so many people don't understand how Social Security benefits are determined -- the formulas can be confusing. But your behavior throughout your career, especially at the time of retirement, could have a huge impact on your monthly income for the rest of your life. Fortunately, you can learn everything you need to know right here. 

Social Security card sitting on top of money.

Image source: Getty Images.

How is your Social Security benefit determined?

Multiple steps determine how much Social Security income you'll receive. Here is how the SSA does it:

  • Your AIME is determined. AIME stands for Average Indexed Monthly Earnings. It's calculated by taking your 35 highest years of earnings, adjusting them for wage growth, then figuring out the inflation-adjusted average wage earned per month. The Social Security Administration uses the Average Wage Index (AWI) to adjust for wage growth. It takes time for AWI to be updated, so the AWI used to adjust your wages is the AWI figure from the year you turned 60. 
  • Your primary benefit amount is determined based on your AIME: In 2019, you get credit for 90% of AIME for the first $926 in earnings; 32% of AIME for income above $926 up to $5,583 in earnings; and 15% of AIME for earnings above $5,583. These dollar thresholds -- $926 and $5,583 -- are called bend points, and they change periodically.  
  • Adjusting your income based on the age you claim benefits: Your primary benefit amount is the amount you receive if you claim benefits at full retirement age (FRA). If you claim earlier, your monthly benefit is reduced for each month before FRA. For the first 36 months early, benefits are reduced by 5/9 of 1% per month. If you claim more than 36 months prior to FRA, benefits are reduced by an additional 5/12 of 1% per month. If you wait to claim until after FRA, benefits increase by 2/3 of 1% for each month after FRA, up until age 70. You can refer to this chart to see exactly how claiming early or late could affect your monthly Social Security benefits. 

How can you maximize your monthly benefit?

Once you understand the formula used to determine your maximum benefit, it's easy to see what steps you can take to get the highest possible monthly Social Security income. Just do the following, if you can:

  • Work at least 35 years. If you don't work for the full 35 years that goes into figuring out your AIME, you'll have some years with $0 in wages factored in. This could reduce AIME significantly, thus lowering the benefits you receive. 
  • Consider working longer if you're earning a lot more now: If your salary is really high at the end of your career, you may want to work a few extra years so you can replace some years when you had lower wages. AIME is based on your highest 35 years of earnings, so the more years you work with a higher income, the fewer years of lower wages will be factored in. 
  • Wait to claim benefits. Claiming early can significantly reduce your monthly income. But you also need to consider your health and how long it will take you to break even on your total lifetime benefits. There's some simple math to tell you how long you'll need to receive higher monthly benefits to make up for years when you wait to claim. If you don't expect to live that long, you'd actually be better off accepting a lower benefit for more years. 

You should also understand how Social Security spousal benefits work. If your spouse earned more than you, you may be able to get a larger monthly benefit by claiming on your spouse's work record. It's also more important for a higher-earning spouse to delay claiming benefits as long as possible to maximize survivors benefits that a widow or widower would receive. 

Make sure you understand how Social Security works

Social Security is guaranteed for life, and you get raises as the cost of living rises. You want to get the most money you can from Social Security to have a comfortable retirement -- so don't claim benefits until you understand how it works. Now you know the basics of how your benefit is determined and how you can maximize it, so you're in pretty good shape to make informed decisions. 

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