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3 Ways You Determine Your Social Security Benefit Before You Sign Up

Social Security is synonymous with retirement to many people, but your relationship with the program starts long before you retire. You pay Social Security taxes on your income during your working years, and the government uses this money to fund benefits for seniors today. But it also keeps your information on file to use when calculating your future checks. Here's a closer look at three ways your actions today affect your Social Security benefits.

1. Your Social Security checks are tied to your income during your working years

As mentioned above, the Social Security Administration taxes your income today to fund benefits for current recipients. The Social Security payroll tax rate is 12.4%, split evenly between employee and employer. Normally, this automatically come out of your paychecks, unless you're self-employed. Then, you have to pay estimated taxes to cover the entire amount.

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Generally, the more you pay in Social Security taxes over your career, the larger your Social Security checks will be once you retire. But this isn't always true for high earners.

There's an annual cap on income subject to Social Security taxes. In 2023, it's $160,200. It was lower in past years. Earning more than this may help your quality of life today, but it won't increase your retirement checks in the future.

2. The length of your career also matters

The Social Security benefit formulauses at the average monthly earnings you paid payroll taxes on during your 35 highest-earning years. This is true even if you've worked longer. Those who have worked fewer years will have zero-income years factored into their benefits, reducing the size of their checks.

Though it's not true for everyone, many workers who remain in the workforce for longer than 35 years before claiming benefits see their Social Security checks climb. This is because a lot of people earn more money later in their careers than they did starting out. Once workers pass the 35-year mark, these early, lower-earning years drop out of their benefit calculation as more recent, higher-earning years replace them.

3. Failing to check your earnings record could cost you

The government keeps track of the income you've paid taxes on in your earnings record, which you can view by creating a my Social Security account. Your account also has a calculator you can use to estimate your future Social Security benefits at any claiming age.

It's good practice to check your earnings record at least once per year to make sure the information listed there is accurate. It usually is, since it comes from the IRS. But mistakes could happen if, for example, you transposed some digits in your Social Security number on your employment paperwork or failed to notify your employer about a legal name change.

For most people, the income shown in your earnings record for each year should match your annual income for that year, per your tax records. However, as mentioned above, high earners may see a lower number listed in their earnings record, and that could still be correct if they hit the cap on income subject to Social Security taxes that year. Look up what the cap was for a given year if you're not sure.

Should you spot errors in your earnings record, notify the Social Security Administration right away. Fill out a Request for Correction of Earnings Record form and mail it, along with copies of any documentation you have showing your actual income for the year. The Social Security Administration will do an investigation and update your record as appropriate.

Use this information to your advantage

Now that you understand a little more about how your decisions today influence your Social Security benefits, you can use that knowledge to increase how much you receive. In addition to checking your earnings record annually, look for opportunities to increase your annual income. This could involve working overtime, finding a better-paying job, or negotiating a raise.

Think carefully about when you plan to retire as well. Whenever possible, try to remain in the workforce for at least 35 years so you don't have any zero-income years weighing down your benefit.

And be sure to keep an eye out for any future changes to Social Security that could affect you. Be prepared to adjust your strategy as necessary over time to maximize your future checks.

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