• Understand the fundamentals of Social Security benefits, including the eligibility criteria, benefit amounts, and strategies for claiming
• Assess the retirement benefits provided by their employer, such as 401(k) plans, pension plans, and other retirement savings options
• Differentiate between basic forms of investments, such as stocks, bonds, mutual funds, and real estate

Social Security Benefits: Understanding the Fundamentals

Social Security is a crucial part of financial security in retirement for many people. However, the specifics of who is eligible, how benefits are calculated, and when and how to claim can be complex. This page aims to provide an understanding of the key fundamentals of Social Security benefits.

Apart from retirement benefits, Social Security also pays other types of benefits such as disability benefits to disabled workers who meet medical and insured requirements.

Who is Eligible?

To qualify for Social Security benefits, one must meet certain work-related requirements, often expressed in terms of “credits.” These credits are effectively a measure of the total duration and recentness of one’s contributions to the Social Security system through taxed work.

eligibility requirements of social security

The criteria stipulates that typically [latex]40[/latex] credits are needed, which is equivalent to approximately [latex]10[/latex] years of work. These credits are based on your earnings, and the amount of earnings required for a credit changes from year to year. 

In 2023, you earn one credit for each [latex]$1,410[/latex] of wages or self-employment income, and you can earn up to four credits per year.

The situation is somewhat different for younger people who might not have had the opportunity to work for [latex]10[/latex] years. In these cases, fewer credits are required for them to be eligible for disability benefits, or for their family members to be eligible for survivor benefits.

Eligibility for Social Security benefits is not solely a matter of accruing credits. The age at which one chooses to retire and start claiming benefits can significantly influence the amount received. This is because the Social Security system is designed to balance out benefits over time.

You are entitled to your full retirement benefits at your full retirement age. Therefore, if you claim benefits early, your monthly benefit amount will be reduced. Conversely, if you delay retirement beyond your full retirement age, you will receive increased monthly payments to compensate for the period during which you were not receiving benefits.

full retirement age (FRA)

Your full retirement age is dependent on the year of your birth.

Year of Birth	Full Retirement Age
[latex]1942[/latex] or earlier	[latex]65[/latex]
[latex]1943-1954[/latex]	[latex]66[/latex]
[latex]1955[/latex]	[latex]66[/latex] and [latex]2[/latex] months
[latex]1956[/latex]	[latex]66[/latex] and [latex]4[/latex] months
[latex]1957[/latex]	[latex]66[/latex] and [latex]6[/latex] months
[latex]1958[/latex]	[latex]66[/latex] and [latex]8[/latex] months
[latex]1959[/latex]	[latex]66[/latex] and [latex]10[/latex] months
[latex]1960[/latex] and later	[latex]67[/latex]

There are online FRA calculators provided by the Social Security Administration to determine when you become eligible for unreduced Social Security retirement benefits. The Social Security Administration  also offers a 10-minute eligibility checker to see if if an individual qualifies for benefits.

Benefit Amounts

The amount of Social Security benefits a person is eligible to receive is not arbitrary. Instead, it is meticulously calculated based on an individual’s average indexed monthly earnings (AIME), which summarizes up to [latex]35[/latex] years of a worker’s indexed earnings. This indexing ensures future Social Security benefits reflect the general rise in the standard of living that occurred during the person’s working lifetime.

Up to [latex]35[/latex] years of earnings are considered, selecting the years with the highest indexed earnings. These earnings are then summed and divided by the total number of months in those years, and the resulting average is rounded down to the next lower dollar amount to determine the AIME. If you worked less than [latex]35[/latex] years, zeros are factored into the calculation, reducing your overall benefit.

average indexed monthly earnings (AIME)

A person’s average indexed monthly earnings (AIME) is a calculated average that summarizes up to [latex]35[/latex] years of a worker’s earnings, adjusted or “indexed” to reflect changes in general wage levels over the individual’s working years. 

Once calculated, a person’s AIME is then put through a formula to compute the primary insurance amount (PIA), which serves as the foundation for the benefits that are paid to an individual.

primary insurance amount (PIA)

The primary insurance amount (PIA) is the benefit (before rounding down to next lower whole dollar) a person would receive if he/she elects to begin receiving retirement benefits at his/her FRA.

The PIA is the sum of three separate percentages of portions of the AIME. The percentages in the PIA formula are fixed by law, but the dollar amounts in the formula, known as “bend points,” change annually with changes in the national average wage index. The bend points in the year 2023 PIA formula are [latex]$1,115[/latex] and [latex]$6,721[/latex] for workers becoming eligible in 2023.

How to: Calculate Primary Insurance Amount (PIA)

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2023, or who dies in 2023 before becoming eligible for benefits, his/her PIA will be the sum of:

1. [latex]90[/latex] percent of the first [latex]$1,115[/latex] of his/her AIME, plus
2. [latex]32[/latex] percent of his/her AIME over [latex]$1,115[/latex] and through [latex]$6,721[/latex], plus
3. [latex]15[/latex] percent of his/her AIME over [latex]$6,721[/latex].

The final monthly retirement benefits, derived from the PIA, may be higher or lower than the PIA depending on when one chooses to retire. If one retires before the normal retirement age, reduced benefits are paid. For example, a person retiring at exactly age 62 in 2023 will receive a benefit that is [latex]30[/latex] percent less than their PIA. Conversely, benefits can be higher than the PIA if one retires after the normal retirement age. The credit given for delayed retirement will gradually reach [latex]8[/latex] percent per year for those born after 1942.

An individual can plan and get an estimate of their monthly payment using the Plan for Retirement tool from the Social Security Administration.

Claiming Strategies

Deciding when to start claiming Social Security benefits can significantly impact the amount you receive over your lifetime. Although you can begin claiming benefits as early as age [latex]62[/latex], doing so will permanently reduce your monthly benefit. For each year you delay claiming past your full retirement age (which ranges from [latex]66[/latex] to [latex]67[/latex], depending on when you were born), you earn delayed retirement credits, which increase your monthly benefit up to age [latex]70[/latex].

While individual circumstances vary, generally, if you are in good health and can afford to wait, delaying claiming may lead to higher lifetime benefits. Conversely, if you need income immediately or have health concerns, claiming early may be the better choice. Understanding the fundamentals of Social Security is key to maximizing your benefits and securing your financial future in retirement. Always consider your individual circumstances and consult with a financial advisor to make the most informed decision.