If you’re planning to retire within the next five to 10 years and are thinking about where Social Security fits into your retirement strategy, you’re already ahead of the game. By understanding how Social Security is calculated, how early or late retirement can impact your monthly benefit, and how to check where you stand, you’ll be in a great position to make the best financial decisions for you and your family.
With that in mind, here’s a quick pre-retiree’s guide to how your Social Security benefit is calculated, how to check where you stand, and other important details you should know a few years before you file for benefits. I’ll also discuss whether you should be worried about Social Security running out of money.
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How does the SSA calculate your Social Security retirement benefit?
Don’t worry. I won’t go through all the technical details of how your Social Security benefit is calculated. If you want a full explanation, I encourage you to read this thorough guide.
The general idea is as follows:
- The Social Security Administration (SSA) adjusts all of your past earnings for inflation and takes the 35 highest years.
- These 35 years of earnings are averaged together and divided by 12 to produce your average indexed monthly earnings.
- This is applied to a formula that determines your initial Social Security benefit at full retirement age (67 for those born in 1960 or earlier). This is referred to as your primary insurance amount.
Now, you can start collecting Social Security as early as age 62 or as late as age 70. But if you start early, your benefit will be permanently reduced by as much as 30%, depending on how soon you file for benefits. On the other hand, if you wait until after full retirement age, you can get as much as 24% more if you wait until 70.
It’s also worth noting that early and late retirement adjustments are made based on how many months you are from full retirement age. Even a few months sooner or later can make a significant difference in your retirement income.
How to check where you stand
If you haven’t done so already, create a “my Social Security” account at www.ssa.gov and check your most recent Social Security statement. These are updated annually and contain some extremely important information.
For one thing, you can view a year-by-year breakdown of your earnings record. You can also see an estimate of your Social Security benefit based on your actual earnings, as well as what your benefit would be if you retired before or after your full retirement age. It also has valuable information about things like disability benefits, Medicare, and more. It’s tough to overemphasize how important it is for those close to retirement age to check their statements.
1 important thing for pre-retirees to know
You may have heard that Social Security isn’t exactly in the best financial shape, in the sense that the program is operating at a deficit and is expected to do so for the foreseeable future.
However, it’s also important to know that Social Security has trillions in reserves, and history tells us that something will be done to fix it, even if it’s a last-minute solution before Social Security runs out of reserves (expected in 2034). In fact, the reason the full retirement age gradually increased from 65 to 67 is because of the Social Security Amendments of 1983 that were used to solve the last financial problem. And as an absolute worst-case scenario, Social Security would still be able to pay about 80% of benefits with payroll tax revenue, even if the reserves were depleted.
The point is that if you’re close to retirement age, there’s little reason to worry about Social Security going away, or even that any changes would affect you in a meaningful way. Last time, changes were phased in gradually, and changing anything for people at or near retirement age is a highly unpopular idea at both ends of the political spectrum.
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