Proactively planning for the future is the key to living The GoodLife in Retirement. For that reason, it’s important to consider how your Social Security payments will impact your financial circumstances down the road.
Will your SSI payment amount be approximately the same amount as the take-home pay that you earn from working wages? Do you need to budget for a loss of income? If so, how much? How much do you need to retire? How early can you retire?
These are all great questions that we address in today’s post. We’ll teach you how to estimate your Social Security payment and discuss strategies to increase your income during retirement. Click on a question below to navigate directly to your answer or read end-to-end for a comprehensive overview.
How much is a monthly Social Security payment?
Social Security payments are not a uniform amount; your unique payout depends on a number of factors including:
- Your date of birth
- Your full retirement age
- Your income level
- Your work history
- Your retirement year
It’d be convenient if you could budget for retirement knowing that your monthly Social Security payment will be a flat $X amount, but there are a lot of elements that can affect how large or small your benefit will be.
According to data collected from the U.S. Social Security Administration (SSA), the average monthly payment to retired workers was at $1,461.31 as of December 2018. As you can see, this number has been steadily on the rise over the last decade, when the average was $1,152.89 back in 2008.
Note: A retired worker is defined as a beneficiary who worked in covered employment long enough to be insured and who is at least 62 years old. Social Security spousal benefits and disability benefits are calculated differently.
How are Social Security benefits calculated?
The Social Security payment formula can be broken down into five steps.
- Determine your average indexed monthly earnings
- Calculate your primary insurance amount
- Add any cost-of-living adjustments and delayed retirement credits
- Calculate your combined income
- Deduct income tax withholding
Determine your average indexed monthly earnings
Your average indexed monthly earnings (AIME) is determined by taking each year of your earnings accumulated throughout your entire working career up to the taxable maximum amount, which was recently increased to $132,900 per Social Security 2019 changes. Each year is “indexed”, or adjusted for inflation.
The SSA then takes the 35 highest years of indexed earnings, adds them all together, and divides the sum by 35 to calculate your annual average indexed earnings. Dividing this number by 12 determines your lifetime AIME.
Calculate your primary insurance amount
Once you know your AIME, you can then use the figure to calculate your primary insurance amount (PIA), which is your initial benefit amount if you start receiving your Social Security payment at your full retirement age (FRA).
Note: Your FRA is the age at which a person may first become entitled to full or unreduced retirement benefits. The exact number of years and months of your FRA depends on the year you were born but, under current law, is 66+ for those born after 1954 and 67 for those born in 1960 and later.
The PIA formula breaks down your average monthly wage into three parts called “bend points”. For 2019, it is:
- 90 percent of the first $926 of your AIME;
- plus 32% of any amount over $926 up to $5,583;
- plus 15% of any amount over $5,583.
The sum of these three bend points is your PIA, which you’re entitled to at your FRA. The SSA formula may change annually to reflect changes in the economy, but the formula that is applied to your specific AIME is whichever formula was in place in the year that you turned 62—the age at which you’re first eligible to retire.
Beware: You will not be able to receive your full Social Security payment if you retire before your FRA. Filing as young as 62 could cause you to lose more than a quarter of your benefits, so it’s best to wait if possible.
Add any cost-of-living adjustments and delayed retirement credits
On the contrary, your Social Security payout will increase from the PIA, determined by the bend points in the year you turned 62, for every year you delay retirement past that time. Each year the PIA is adjusted upward for any cost-of-living adjustment (COLA) that has been given. For example, more than 67 million Americans will see a 2.8% increase in their Social Security and SSI payment amounts in 2019.
The COLA helps ensure that the purchasing power of Social Security payments is not eroded by inflation, and the percentage is based on the percentage increase in the Consumer Price Index for Urban Wage Earners (CPI-W) as determined by the Bureau of Labor Statistics in the Department of Labor.
Delayed retirement credits are different; they also add to your PIA, but the adjustment is at an incremental, pre-set amount as set by the SSA. You can see how retiring before or after your FRA will affect the percentage of the PIA you’re entitled using their tool online.
Calculate your combined income
With these numbers in place, you and your spouse can begin to budget your Social Security monthly payments and prepare for the future. However, most people—most married couples, in particular—have to pay retirement taxes on their Social Security payments.
In order to learn what portion of your Social Security payout will be withheld for taxes, you must first know your combined income, found using the formula above.
Your adjusted gross income (AGI)
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income”
Deduct income tax withholding
The amount of federal income tax you must pay on your Social Security payouts depends on the amount of your combined income; however, it’s important to note that not all of your Social Security benefit is taxable, only a portion of it.
Look at the table below to see the different tax thresholds and where you might fall.
For example, if you and your spouse are married filing jointly, and your combined income is over $44,000, then up to (and no more than) 85% of your Social Security payment will be considered “taxable income” in the eyes of the IRS.
You can request voluntary tax withholding from your Social Security payout by submitting Form W-4V, otherwise, you can elect to make estimated quarterly payments to fulfill your tax duty.
Note: Many retirees elect to have their Medicare Part B premium deducted from their monthly benefit amount. This standard price is $135.50 for 2019 (although some may pay a different amount), which would take the average Social Security payment down to $1,325.81 per month.
It’s important to consider insurance premiums as well as the healthcare costs of aging in place as you plan for your financial future in retirement. You can see what date your Social Security payment is scheduled at SSA.gov.
How do I increase my Social Security payment amount?
The best way to increase your Social Security payment is by avoiding early retirement. Instead, maximize your benefit amount by delaying filing until age 70, after which point in time you no longer accumulate delayed retirement credits.
You can only increase your benefit amount to a certain point. In 2019, the max Social Security payment is:
- $3,770 for someone who files at age 70
- $2,861 for someone who files at full retirement age (currently 66)
- $2,209 for someone who files at 62
If you’re comparing these figures to the average retirement income or the average net worth at retirement and do not feel confident in the Social Security system’s ability to keep you afloat for 20-30 years, you’re not alone.
According to The 2018 Retirement Confidence Survey conducted by EBRI, only 7% of respondents were very confident that the Social Security system would continue to provide benefits to retirees of at least equal value as those received as of January 2018.
How can I improve my cash flow during retirement?
One of the top concerns among seniors is the inability to enjoy a comfortable retirement, filled with new retirement hobbies and easy access to healthcare, due to shortcomings in Social Security payments.
In addition to pursuing a part-time job in retirement, reverse mortgage benefits help provide retirees additional income in the form of loan proceeds. If you’re curious to see what portion of home equity you might be able to convert into cash, we offer a free reverse mortgage calculator to give you a sense of the positive impact this form of financing may have on your circumstances.
Our team is happy to discuss reverse mortgage eligibility and share the ways this program may benefit you in retirement. Don’t hesitate to reach out to a GoodLife Reverse Mortgage Specialist with any questions you may have.