There are many older Americans today who are living on just Social Security. And for people in that situation, reduced retirement benefits could be a huge problem.
As it is, the average monthly Social Security benefit today is only $2,086, which amounts to roughly $25,000 per year. But some retirees collect a smaller check than the average, and there’s a reason for it.
There’s a Social Security rule you may not be aware of that could lead to smaller monthly checks in retirement, so it’s important to know how benefits are calculated and what you can do to boost yours.
How Social Security benefits are calculated
The amount of money Social Security pays you each month in retirement is based on two factors: your earnings history and your claiming age.
The Social Security Administration (SSA) uses your 35 highest-paid years of income to determine your primary insurance amount. In that formula, earlier wages are adjusted for inflation. From there, your claiming age helps determine what benefit you get.
The earliest age to sign up for Social Security is 62. However, you won’t get your monthly checks in full unless you wait for full retirement age (FRA) to arrive. FRA is 67 for anyone born in 1960 or later.
There’s also the option to delay a Social Security claim past FRA. Each year a claim is delayed beyond that point results in an 8% boost to your monthly checks. You can accrue delayed retirement credits until you turn 70.
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Missing income years could hurt you
Since Social Security benefits account for 35 years of earned wages, if you don’t have a 35-year work history, it means you could end up with smaller monthly checks in retirement.
Imagine you took a five-year career break to raise your children. If you only have 30 years of wages on record, the SSA will include $0 in your benefits formula for each year you’re without a wage.
The more years of missing income you have, the lower your monthly benefits might be in retirement. Someone missing one or two years of income may not see their benefits shrink to the same extent as someone with only a 25-year work history.
An inaccurate earnings record could bite as well
Even if you did work for 35 years, it’s not a given that the SSA will have a record of 35 years of earnings. If you changed your name at any point, or if an employer of yours simply made a mistake and didn’t report your income correctly, you may have some zeros factored into your benefits formula due to the SSA having the wrong information on file.
That’s why it’s so important to verify your earnings record at SSA.gov before retirement begins. You can do so by creating a my Social Security account and accessing your earnings statements.
Missing wages could lead to smaller monthly Social Security checks, as could underreported wages. So if, for example, there’s a year when you earned a total of $82,000, but the SSA only shows $24,000 because you switched jobs mid-year, that could be a problem for you later. So that’s the type of error you’d want to correct.
Late-in-life wages could help
If you’re nearing the end of your career and you realize you don’t have a 35-year work history, all isn’t lost. There are steps you can take to get more Social Security even in that situation.
First, you could opt to delay retirement and stay in the workforce a bit longer. Secondly, you could opt to work part-time as a retiree.
Let’s say you have a 32-year work history by age 67. You may want to claim Social Security then if that’s your FRA. But if you push yourself to work three more years, you can get larger monthly checks two ways: by filling in three $0 income years with actual wages and by delaying your claim.
Similarly, let’s say you can’t continue working full-time at 67 in the aforementioned scenario. If you’re able to work part-time, though, earning $24,000 a year, you can replace those three $0 income years with actual wages. That should, in turn, lead to larger Social Security checks.
Bottom line
Social Security is a crucial source of income for many retirees today. It’s important to know how those benefits are calculated and what to do if your earnings history isn’t as robust as you would have liked.
That said, it’s best to try to line up income outside of Social Security so you’re not overly reliant on those benefits to make ends meet. Saving even $50 a month in an IRA or 401(k) could help you build up a nice retirement nest egg over time, especially if you invest that money wisely.
At the same time, it’s important to be realistic about the bills you can afford to take on in retirement, especially if you’re looking at a monthly Social Security check that isn’t so generous.
Creating a thoughtful budget and practicing frugal living could help eliminate some stress living on Social Security, as can working part-time as a retiree.
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Author Details
Maurie Backman
Most retirees will make their Social Security claiming decision exactly once, which is why Maurie Backman has spent more than 20 years helping them understand it. She covers benefit calculations, COLA forecasts, and the policy changes that quietly reshape what retirees receive each month. Her work has appeared in Kiplinger, The Motley Fool, 24/7 Wall St., Bankrate, and U.S. News & World Report.
