Social Security provides a critical source of income for retirees, so if you're approaching retirement, knowing how much you and your spouse can expect to receive in benefits is smart. Although the amount of money that couples receive in Social Security income will vary depending on work history, income, and when couples begin receiving payments, the average couple is receiving $2,212 per month this year, according to the Social Security Administration.
Are you likely to get this much money, too? Read on to learn how Social Security calculates its payment, and what you should do to maximize your benefit.
First, a quick bit of backgroundMany Americans approach retirement thinking that Social Security is a savings account that's similar to a retirement account, such as an IRA or a 401(k) plan. It isn't. Social Security is a pay-as-you-go system, and that means that the 12.4% payroll tax you pay today covers the cost of current Social Security recipient's benefits, not your future benefit.
While Social Security accounts for 90% or more of income for nearly a quarter of current married retirees, the system was never meant to provide the lion's share of a retiree's income. Instead, Social Security is supposed to act as a safety net. As such, it replaces about 40% of the average recipient's pre-retirement income.
How's it calculatedNow that we've covered those points, let's dig into the calculation Social Security uses to determine your benefit.
First, Social Security calculates your benefit using a complex formula that converts income earned during your highest 35 working years into today's dollars. Then, those adjusted figures are added together and divided by 420 -- the number of months in 35 years -- to get an average monthly earnings number. That average monthly earnings number is then broken into chunks, and multipliers are used to calculate your monthly benefit at full retirement age, or the age at which you can claim and receive 100% of your benefit (more on that in a bit).
For example, a person who was born in or after 1954 would multiply the first $856 in indexed monthly earnings by 90%, any amount between $856 and $5,157 by 32%, and any amount above $5,157 by 15%. Once those calculations are done, the resulting numbers are added together and rounded down to the nearest dollar. That sum is a person's estimated monthly retirement benefit at full retirement age.
This formula is used to calculate benefits for the primary recipient, but it's also the number that is used to calculate a spouse's benefit, too. Generally, if a spouse is retiring at full retirement age, the spouse can receive half of the amount that the primary recipient would receive at their full retirement age. If the spouse claims early, then the amount they receive will be reduced.
For example, if a spouse born in 1960 claims benefits two years before their full-retirement age, they'd receive 41.67% of the primary recipient's benefit.It may also be helpful to know that, if a spouse's own work record results in a higher Social Security payment than the spousal benefit, then the spouse would receive that higher payment instead.
Although these calculations can be complex, the Social Security Administration provides a handy calculator that can allow married couples to better estimate their benefit when they retire, or individuals can log in to Social Security online and find out their specific benefit.
Maximizing your incomeIn the past, couples could use a file-and-suspend strategy to increase their overall Social Security income. This strategy involved the primary worker and the spouse claiming Social Security at full retirement age. Then the primary worker would suspend his or her payments so that they could benefit from delayed benefit credits that are awarded to people who hold off on receiving Social Security until they reach 70 years old.
Unfortunately, this "loophole" closes at the end of March, but there are a couple of options that can still help couples boost their Social Security income.
First, because Social Security uses the highest 35-years of income to calculate average monthly adjusted earnings, it may benefit couples to work a year or two longer. If the filer's work history includes more than 35 years, then every year worked at a higher income eliminates a low-income earning year, thereby boosting the monthly benefit.
If that's an unpalatable option (and trust me, I understand), and you have other sources of retirement income, then it might be worth delaying Social Security until you reach age 70. Claiming at age 62, the earliest age possible, results in income that is less than you'd receive at your full retirement age (currently age 66); but if you were born after 1943, you'll get an 8% yearly increase to your benefit for every year that you delay receiving Social Security beyond your full retirement age, up to age 70. Unfortunately, delaying until 70 won't increase your spouse's benefit because the spousal benefit will always be based on your full retirement benefit instead.
Nevertheless, combining your higher income from delaying with your spouse's benefit will still provide more income than if you both took Social Security sooner.
The article How Much Do Married Couples Get in Social Security? originally appeared on Fool.com.
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