The Role of Social Security in Retirement: Understanding Benefits and Timing

Social Security arose in the mid-1930s to act as a financial safety net. At the time, the Great Depression had obliterated most people's private pensions, and most elderly Americans were thus financially insecure. Since then, the United States Social Security program has evolved to include automatic cost-of-living adjustments and benefits for self-employed individuals, dependents and survivors, and disabled workers and adult children.

Today, Social Security benefits are integral to tens of millions of Americans' retirement plans. If you're planning for your retirement, you'd do well to acquaint yourself more fully with the role of Social Security in retirement, particularly in terms of eligibility, benefits calculations, and timing. We'll cover those topics and more in the following guide.

Who qualifies for Social Security benefits?

Strictly concerning a wage earner's retirement benefits, anyone who earns at least 40 Social Security credits qualifies to begin receiving Social Security benefits.

U.S. citizens and legal residents earn Social Security credits by working and paying Social Security taxes. The number of credits an individual earns in a given year depends on how much they earn, and the minimum threshold may change from year to year. In 2024, total wages and self-employment income equaling $1,730 amounts to one credit. A single person can earn up to four credits a year, so one would have to earn at least $6,920 to get credited the maximum.

How do you apply for Social Security benefits?

The U.S. Social Security Administration allows retirees to apply for benefits through its online portal, by calling the SSA at 1-800-772-1213, or by making an appointment at a local Social Security office. Americans living abroad can reach out to their nearest U.S. Embassy or consulate.

When you apply, you'll need to divulge and/or verify the following:

Personal details

• Social Security number.
• Date and place of birth.
• Citizenship status.
• Banking information — routing and account numbers.
• Whether anyone has filed for Social Security benefits, Medicare, or Supplemental Security Income on your behalf.
• Whether you've used a different Social Security number.
• The month in which you want your benefits to begin.
• (If applicable) name, date of birth, age, and Social Security number of your current spouse and/or former spouse(s), as well as the date(s) and place(s) of marriage/divorce/death.
• (If applicable) names of unmarried children under 18, aged 18 to 19, in elementary/secondary school, or disabled before 22.
• (If you want to enroll in Medicare Part B) whether you're within three months of age 65.

Professional Details

• Name(s) and address(es) of employer(s) for the current and previous year.
• Total earnings from the current and previous year.
• (If applying from September through December) estimated earnings for the following year.
• Copy of Social Security Statement or record of earnings.
• (If applicable) start and end dates of active U.S. military service before 1968.
• Whether you've become unable to work because of illness, injury, or some other condition within the previous 14 months (plus the date when you became unable to work, if affirmative).
• Whether you (or your spouse) have worked in the railroad industry.
• Whether you've earned Social Security credits under another country's system.
• Whether you expect to receive a pension or annuity because of your employment with the U.S. federal government or a state/local subdivision.

Documents

• Proof of birth.
• Proof of citizenship or lawful alien status.
• Copy of previous year's W-2 and/or self-employment tax return.
• (If applicable) copy of U.S. military service papers.

How are Social Security benefit amounts calculated?

Your monthly Social Security benefit amount depends on your average pre-retirement earnings, not the total number of credits you've earned. Specifically, the SSA uses the Social Security benefits formula to calculate a base figure known as the primary insurance amount. The formula hinges on a beneficiary's average indexed monthly earnings, which refers to their mean monthly income over their 35 highest-earning inflation-adjusted years.

To calculate AIME, the SSA adds the total inflation-adjusted earnings from a beneficiary's 35 highest-earning years and divides the sum by the total number of months in said years. The resulting quotient is rounded down to the nearest dollar amount to determine the beneficiary's AIME.

The AIME is then divided into three segments called bend points, each with an associated percentage multiplied by the dollar amount. The dollar amounts for the bend points change regularly to reflect the national average wage index, but the percentages are constant. For a beneficiary who begins to receive benefits in 2024, the breakdown is as follows:

• The first $1,174 of one's AIME is multiplied by 90%.
• AIME over $1,174 and up to $7,078 is multiplied by 32%.
• Any AIME over $7,078 is multiplied by 15%.

The three products are then added together, and the sum is rounded down to the nearest lower multiple of $0.10 except when the sum is already a multiple thereof. The result is the beneficiary's PIA.

An example of how to calculate Social Security benefit amounts

That's a large amount of information, so here's a step-by-step example to illustrate:

1. J. Doe worked for 41 years from 1984 to 2023 and applied for Social Security benefits in 2023.
2. Their 35 highest-earning years added together amount to $2,235,012, adjusted for inflation.
3. The total number of months across those 35 years is 420. J. Doe's highest-35 total divided by 420 is $5,321. That's J. Doe's AIME.
4. The first $1,174 of J. Doe's AIME is multiplied by 0.9, which equals $1,056.6.
5. The remaining $4,147 is multiplied by 0.32, which equals $1,327.04.
6. J. Doe's AIME has nothing above $7,079, so there's no need to multiply anything by 0.15.
7. Now, we add the products of the first two bend points for a sum of $2,383.64.
8. Rounding down to the nearest lower multiple of $0.10, we get $2,383.60.
9. Therefore, J. Doe's PIA is $2,283.60, which is the base figure the SSA uses to determine J. Doe's monthly benefit amount.

Is your PIA the same as your monthly Social Security benefit amount?

No, not necessarily. A person's monthly benefit amount can be higher or lower than their PIA. It depends on when they choose to begin receiving their benefits.

To understand this, we have to discuss the concept of full retirement age, which is the age one must reach before they qualify for full retirement benefits. A person's FRA depends on the year they were born, as shown below:

If an individual begins collecting benefits at FRA, they'll receive exactly or close to 100% of their PIA every month. However, the earliest age one can begin receiving benefits is 62, so should they elect to receive benefits at that age, they'll receive a 30% reduced monthly amount (in J. Doe's case above, that would be $1,598.50.)

Delaying benefits has the opposite effect, to a point. Up to an age limit of 70, an individual who delays their benefits will receive additional credits for each delayed year and end up with a monthly amount that exceeds their PIA. The exact credit quantity and attendant percentage depend on their birth year and length of delay. Someone born in 1954 who delays their benefits until 2024 would have a monthly Social Security check that equals 132% of their PIA ($3,014.30 per month for someone with J. Doe's PIA).

Why should (or shouldn't) you delay your Social Security benefits?

The primary advantage of delaying your Social Security benefits is that it locks you into a larger income stream. Looking back at the J. Doe example, you'll see that maximally delayed benefits amount to almost an additional $800 monthly. Theoretically, that money would come when the beneficiary has a clearer sense of their retirement expenses, so it can open up significant opportunities in budgeting and retirement pursuits. For example, imagine the comfort of knowing you can afford to pay for a trip without potentially endangering your savings.

The flip side is the cost of giving up years of benefits without certainty that one can use the money later. A person's health is unpredictable and can take a sudden downturn once they reach their 70s. There's also been a long-time solvency issue, as the SSA foresees a funding shortfall after 2035. With that in mind, retirees may be better off taking their benefits as early as possible and supplementing their Social Security checks with other income sources, such as fixed annuity payouts.

Social Security benefits should be just one part of a diversified retirement portfolio. The other elements include investments, assets, and alternative income streams. The last of these is where we can help. At Blueprint Income, we specialize in helping pre-retirees maximize their financial security with tools and resources centering on annuities. Purchasing a fixed annuity in your 50s or earlier can provide you with a steady cash flow starting from the year of your retirement and lasting the rest of your life. We encourage you to learn more by speaking with a Blueprint annuity consultant at 888-867-7620 or emailing support@blueprintincome.com.

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