Social Security is likely going to be a crucial source of income when you are retired. Unfortunately, because the rules surrounding the program are pretty complex, many people don’t understand exactly what determines the amount of benefits they’ll receive. 

Understanding the factors affecting your Social Security benefit is important so you can make informed choices and avoid mistakes that leave you with less money. Specifically, two big things control the size of your monthly payments that you need to know about. Here’s what they are. 

1. Average monthly earnings

The first big factor that determines the size of your Social Security check is the amount you earned over your career.

Benefits are designed to replace around 40% of pre-retirement income, but things aren’t quite that simple. What happens is that you receive a specific percentage of your Average Indexed Monthly Earnings or AIME. 

AIME is calculated by:

• Adjusting wages from throughout your career for wage growth 
• Determining your average indexed monthly earnings, after this inflation adjustment, using data from the 35 years when you made the most money

Because AIME always uses a 35-year work history, you’ll want to be sure you put in at least that long on the job to avoid a reduction in benefits thanks to years of $0 wages being included in your average wage calculation. If you’re earning a lot late in life, working more than 35 years can also be helpful to increase your AIME by replacing lower-earning years with higher-earning ones. 

Once your AIME is calculated, you’ll receive benefits equal to a set percentage of it, with the exact percentage based on how much you earn relative to “bend points” or income thresholds. Specifically, you’ll get:

• 90% of AIME up to the first bend point
• 32% of AIME between the first and second bend point
• 15% of AIME above the second behind point

Bend points change each year. The ones that are used to determine your benefit are typically the ones that are in effect in the year you turn 62. 

2. Your claiming age 

The next big factor that determines the size of your Social Security check is how old you are when you claim it.

You are allowed to claim Social Security as young as 62. You can also delay until age 70 and continue to get a benefits increase for each month you wait. However, if you want your standard benefit, you must claim it right at your full retirement age (which is 67 for anyone born in 1960 or later). 

Unfortunately, if you claim benefits younger than FRA your payments are reduced for life. You get hit with monthly early filing penalties. Those penalties add up to a 6.7% reduction in benefits for each of the first three years you claim early and another 5% per year before that. Because of these penalties, a person with an FRA of 67 who retires at 62 would lose 30% of their monthly Social Security income. 

If you claim after FRA, though, you get fewer payments during your lifetime and miss out on years of income — but each payment is bigger once you eventually begin collecting. Delayed retirement credits are the reason your benefit goes up if you wait to claim until after FRA. These credits equal 2/3 of 1% for each month you delay and they add up to an 8% annual benefits increase. You can earn a total of a 24% bump in benefits if you claim at 70 with an FRA of 67. 

By understanding how your standard benefit is calculated and how you can shrink or increase it based on when you file for Social Security, you can make smart choices about how long to work as well as when to file for your first payment. This can help you maximize this important source of retirement income so you can have more financial freedom in your later years. 

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