What Is Social Security Income?

Social Security income is an important source of retirement income for millions of Americans. The program provides retirement benefits to eligible workers, as well as benefits for certain spouses, survivors, and people with disabilities.

For retirement planning, it is important to understand how Social Security benefits are calculated, when you can claim them, and how the age at which you begin benefits affects your monthly income. Social Security can provide a lifetime stream of inflation-adjusted income, but it is generally only one part of a complete retirement plan.

How Is Social Security Income Calculated?

Your retirement benefit is primarily based on your earnings history. Social Security generally uses your highest 35 years of indexed earnings to calculate your Average Indexed Monthly Earnings (AIME). If you have fewer than 35 years of covered earnings, years with no earnings can be included in the calculation.

The basic calculation involves several steps:

• Average Indexed Monthly Earnings (AIME): Your historical earnings are adjusted using Social Security's wage-indexing rules, and your highest 35 years are used to determine your average monthly earnings for benefit purposes.
• Primary Insurance Amount (PIA): A progressive formula is applied to your AIME. The formula uses different percentages for different portions of your AIME, with the dollar thresholds known as "bend points."
• Claiming-Age Adjustment: Your PIA represents the basic benefit payable at your Full Retirement Age (FRA). Claiming before FRA permanently reduces the monthly benefit, while delaying beyond FRA can increase it until age 70.

When Can You Take Social Security Benefits?

Most workers can begin receiving Social Security retirement benefits as early as age 62. However, claiming age has a permanent effect on the monthly benefit amount.

Claiming at Age 62

You can generally begin retirement benefits at age 62. If you claim before your Full Retirement Age, your monthly benefit is permanently reduced. For someone whose FRA is 67, claiming at 62 results in a maximum reduction of 30%.

The reduction is calculated on a monthly basis rather than simply subtracting a flat percentage from the benefit. For the first 36 months before FRA, the reduction is 5/9 of 1% per month, followed by a smaller monthly reduction for additional months.

Full Retirement Age

Your Full Retirement Age depends on your year of birth. For people born from 1943 through 1954, FRA is 66. It gradually increases for later birth years, reaching 67 for people born in 1960 or later.

Reaching FRA means you are eligible for 100% of your Primary Insurance Amount. It does not necessarily mean you have to retire or start collecting Social Security at that age.

Delaying Benefits Until Age 70

If you were born in 1943 or later, delaying retirement benefits beyond FRA generally increases your benefit by 8% for each full year of delay, up to age 70. The increase stops once you reach age 70.

For example, someone with a Full Retirement Age of 67 who waits until age 70 receives 124% of their FRA benefit, before considering any other adjustments.

Strategies to Maximize Social Security Income

There is no single claiming age that is appropriate for everyone. The right decision depends on factors such as your other retirement income, health, longevity, employment plans, taxes, family circumstances, and how much guaranteed income you need.

Work Longer When It Makes Sense

Because Social Security generally uses your highest 35 years of earnings, continuing to work can increase your benefit if a new year of earnings replaces a lower-earning year in your record. This can be particularly relevant for someone who has fewer than 35 years of covered earnings.

Consider Delaying Benefits

Delaying benefits after FRA can provide a larger monthly benefit later in life. For people born in 1943 or later, delayed retirement credits can increase the benefit by 8% per year until age 70.

Delaying is not automatically the right choice. A retirement plan should consider how Social Security interacts with savings, pensions, taxes, spending needs, and other sources of income.

Coordinate Benefits With Your Spouse

Married couples may have additional planning considerations because spouses can potentially qualify for benefits based on their own earnings record or their spouse's earnings record. Survivor benefits can also make the claiming decisions of the higher-earning spouse particularly important.

Some older Social Security articles discuss a strategy called "file and suspend." However, the rules changed in 2016. For most people affected by the newer rules, voluntarily suspending a retirement benefit also suspends benefits payable on that worker's record, including a spouse's benefit. In addition, deemed-filing rules generally require people who became eligible under the newer rules to apply for both retirement and spousal benefits when they are eligible for both.

Because Social Security claiming rules can be complicated, married couples should evaluate their individual records rather than relying on older claiming strategies described online.

Consider Longevity and Household Income Needs

Social Security provides lifetime income for eligible beneficiaries. The value of a larger monthly benefit can therefore become increasingly important over a long retirement.

At the same time, someone with substantial other income or a need for cash flow earlier in retirement may have different priorities. The important question is how the claiming decision fits into the entire retirement-income plan.

Example: Calculating a Social Security Benefit

The following is a simplified example using the 2024 Social Security benefit formula. It is intended to demonstrate the mechanics of the calculation rather than estimate an individual's actual benefit.

Step 1: Determine Your Average Indexed Monthly Earnings (AIME)

Suppose a worker has 35 years of earnings after the applicable wage indexing adjustments. For illustration, assume the worker's highest 35 years of indexed earnings total $2,100,000.

There are 420 months in 35 years:

35 years × 12 months = 420 months

The simplified AIME calculation would therefore be:

$2,100,000 ÷ 420 = $5,000 AIME

Step 2: Apply the 2024 PIA Formula

For workers attaining age 62 in 2024, the Social Security formula applies:

• 90% of the first $1,174 of AIME
• 32% of AIME over $1,174 through $7,078
• 15% of AIME over $7,078

With an AIME of $5,000:

• 90% of $1,174 = $1,056.60
• $5,000 − $1,174 = $3,826
• 32% of $3,826 = $1,224.32
• The 15% bracket does not apply because the AIME is below $7,078.

Adding the two applicable portions gives:

$1,056.60 + $1,224.32 = $2,280.92

After the applicable Social Security rounding rules, the resulting PIA would be approximately $2,280.90 per month.

Step 3: Adjust for Claiming Age

Suppose this worker has a Full Retirement Age of 67.

If the worker claims at age 62, the maximum reduction for someone with an FRA of 67 is 30%. The simplified calculation would therefore be approximately:

$2,280.90 × 70% = $1,596.63 per month

If the same worker waits until age 70, the benefit would be approximately 124% of the FRA amount:

$2,280.90 × 1.24 = $2,828.32 per month

This example illustrates how substantially the claiming age can affect monthly Social Security income. Actual benefits can differ because of an individual's earnings record, indexing factors, claiming month, COLAs, family benefits, and other applicable rules.

The Role of Social Security in Retirement Planning

Social Security is designed to replace only part of a worker's previous earnings, not to provide all of the income needed in retirement. The Social Security Administration has historically described Social Security as replacing roughly 40% of the earnings of a typical worker, although the actual replacement rate varies depending on earnings and how the comparison is calculated.

This makes Social Security an important component of a broader retirement-income strategy.

• Lifetime Income: Social Security can provide income for life, helping address the risk of outliving retirement savings.
• Inflation Protection: Social Security benefits receive annual cost-of-living adjustments under current law.
• Integration With Savings: Social Security can be combined with 401(k)s, IRAs, taxable investments, pensions, and other retirement resources.
• Tax Planning: Depending on your income and circumstances, some Social Security benefits may be subject to federal income tax. Retirement withdrawals and other income sources can therefore affect the after-tax value of your retirement income.

Social Security and the Earnings Test

If you claim Social Security before Full Retirement Age and continue working, your benefits can be temporarily reduced if your earnings exceed the annual earnings-test limit.

Once you reach Full Retirement Age, the earnings test no longer applies. Social Security can also recalculate benefits after FRA to account for months in which benefits were withheld because of excess earnings.

This is an important consideration for anyone who plans to work while receiving Social Security.

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