Retirement planning is a crucial aspect of financial stability, and understanding Social Security benefits plays an important role. For many Americans — about 68 million according to the Social Security Administration — that monthly direct deposit is a crucial part of their after-work income.
According to the government’s most recent annual data — released in late 2023 — $1,505 is the average monthly Social Security income for someone age 65. That’s just an average. What people actually get depends on a number of variables, most notably their lifetime earnings history and the age at which they began receiving benefits.
You also need to consider the tax implications and your passive income after you start drawing Social Security. It is critical to fully understand how all of these factors affect your Social Security income to ensure you receive the highest benefit available.
But for now, let’s look at what determines what you get in the first place.
Factors That Affect Your Social Security Benefits
One of the most important factors that affect your Social Security benefit is your average indexed monthly earnings (AIME). This figure is calculated based on the 35 years that you earn best. The Social Security Administration (SSA) uses a formula to convert your AIME into your Primary Insurance Amount (PIA), which helps determine your monthly benefit. If you have had income for less than 35 years, zeros are included, which reduces your benefit.
Then there is the age at which you receive benefits. Even though you can start taking Social Security at age 62, if you file for benefits before you reach full retirement age (FRA), your benefits will be permanently reduced. Although you will receive it for months to come.
The FRA is 66 years for people born between 1943 and 1954, gradually increasing to 67 years for people born in 1960 or later. If you delay claiming your benefits beyond your FRA (but only until age 70), your monthly payment will increase. Although you get it for less months.
Strategies to Maximize Your Benefit
To maximize your Social Security benefits, consider working for at least 35 years to avoid years of earning nothing from affecting your calculation. Additionally, increasing your income can have a direct effect on your benefit amount.
Another successful tactic may be delaying your benefit application. Every year you defer past your FRA, until you are 70 years old, your benefit increases by about 8%. Your monthly income could increase by a few hundred dollars per month or more if you wait, giving you more financial security as you get older. However, you should consider things like your life expectancy and how quickly you need the money to figure out whether it makes overall sense to delay your benefits and receive them for fewer months.
Will average work for you?
Although the numbers change monthly, the average monthly retirement benefit is about $1,900 per month, or about $22,800 per year. That’s not a lot of money depending on where you live and what expenses you have, so it’s essential to consider additional sources of retirement income.
Personal savings, retirement accounts like 401(k)s or IRAs and other investments can provide you with extra money in retirement, and diversifying your income sources will only reduce dependence on Social Security and provide greater financial stability.
Healthcare costs are another important factor. It is essential to anticipate these expenses as they tend to increase with age. Medicare doesn’t pay for everything, and for most people it doesn’t start until age 65.
A health savings account (HSA) or supplemental insurance can help you fill in the gaps and ensure you’re prepared for future medical expenses.
Today is the time to make plans for tomorrow
Online resources abound for calculating your potential Social Security income, but it can still be complicated. Creating your free personal account with the Social Security Administration can be a good step to see what awaits you in the future. It may also be appropriate to consult a qualified tax professional and/or financial advisor.
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This Is the Average Social Security Benefit for People Age 65 was originally published by The Motley Fool
