Millions of Americans rely heavily on Social Security to fund their retirement. For most people, a significant portion of their working life is spent contributing to Social Security with the expectation that it will provide a source of income in retirement.
While there are some exceptions based on specific job types, the vast majority of workers expect to benefit from this system after years of contributing to it.
Given the importance of Social Security in retirement security, future retirees must understand what they can expect to receive. The amount an individual receives is largely determined by when they decide to begin claiming benefits.
While it is difficult to predict an exact monthly benefit amount if you are still years away from retirement, due to variables such as annual cost-of-living adjustments (COLA) and fluctuations in personal earnings, you can use average monthly benefits as a starting point for your financial plans.
How to know how much you will get in Social Security benefits
Social Security uses a specific formula to calculate how much you will receive. It starts with calculating your average earnings over the 35 highest-paid years. This is called your average indexed monthly earnings (AIME).
Social Security adjusts these earnings for inflation, a process known as “indexing,” to bring past earnings into line with current dollar values. To calculate the AIME, divide your total earnings over the previous 35 years by the number of months in those years.
If you do not have 35 years of earnings, zeros will be added for the years when you did not work, potentially lowering your average.
After calculating your AIME, Social Security uses a formula that includes specific “bend points,” which change annually, to calculate your primary insurance amount (PIA).
The PIA is the monthly benefit you would receive if you applied for benefits at the full retirement age. The full retirement age varies by birth year, but ages 62, 67, and 70 are important milestones in the Social Security timeline.
The earliest you can claim benefits is at age 62, but doing so reduces your monthly benefit. Waiting until your full retirement age, which is usually around 67, allows you to claim the entire PIA.
There is an additional benefit for those who can wait until they reach the age of 70 to claim: your monthly payout will be increased. Specifically, claiming at 62 reduces your PIA by about 30%, whereas delaying until 70 increases your benefits by about 24%, assuming your full retirement age of 67.
The financial impact of claiming at these critical ages is significant, so it’s helpful to have an idea of the average monthly benefit at each stage.
If you retire at full retirement age in 2024, your maximum benefit will be $3,822. However, if you retire at age 62 in 2024, the maximum benefit is $2,710. If you retire at age 70 in 2024, your maximum benefit will be $4,873.
These benefit amounts, of course, are subject to change over time due to cost-of-living adjustments and other factors, but they provide a good estimate of what retirees may receive.
While understanding how and when you will receive Social Security benefits is critical, another equally important question arises: can you live comfortably on Social Security alone?
The answer is dependent on a number of factors, including your lifestyle, expenses, and retirement plans. For example, someone who lives in a high-cost area like Southern California and intends to travel extensively may require significantly more income in retirement than someone with simpler goals, such as spending time in a more affordable area like North Carolina’s Outer Banks.
Regardless of personal circumstances, retirees frequently discover that Social Security alone cannot cover all of their retirement expenses.
