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How to Maximize Your Social Security Benefits

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Last year, a friend recommended that I replace my brakes because my car was making a squealing noise when I backed up. A few days later, I was happy to stumble upon a $200 coupon to replace all four brake pads. Unfortunately, my final bill ended up being closer to $1,200 after the mechanics persuaded me that my car needed a lot more work. Did I really need new calipers, rotors and ceramic pads? I have no idea. The point is that I don’t speak car language — which leaves me exposed to getting ripped off. The same exposure exists when it comes to Social Security. The more educated you are, the more you’ll be able to capitalize on the system.

“At your FRA, you’re entitled to your PIA, which is based on your AIME. Unless, of course, you delay, in which case, you will receive DRCs.”

Confused? You’re likely not alone.

In the last few years there has been an explosion of literature regarding the best ways to claim Social Security. (My firm even teaches courses on this information.) But, just as I wouldn’t go from zero car knowledge to trying to build an engine, many consumers would benefit from learning the fundamentals of Social Security first. After all, you must crawl before you walk. If you speak the language of Social Security, you will be better equipped to figure out which claiming strategy is best for your situation. Here are the top Social Security terms to know in order to maximize your benefits.

1. Federal Insurance Contributions Act (FICA)

Unfortunately, your Social Security retirement checks don’t appear out of thin air. They are funded by payroll taxes. More specifically, they are funded by FICA taxes. And even more specifically, they are funded by the Old Age, Survivor and Disability Insurance (OASDI) component of the FICA tax.

FICA taxes are generally levied on 7.65% of your income, with 6.2% going to Social Security and the remaining 1.45% going to Medicare. The Social Security portion (OASDI) is assessed only on the first $118,500 of income (2015 level), while the Medicare portion applies to all income.

2. Full Retirement Age (FRA)

This is the age at which you receive your full retirement benefit. If you were born between 1943 and 1954, your FRA is 66. The FRA for those born between 1955 and 1959 is between 66 and 67, and it is 67 for anyone born in 1960 or later. You can collect Social Security retirement benefits as early as age 62 (unless you’re a widow), but will be penalized for every month you take your benefit early.

3. Average Indexed Monthly Earnings (AIME)

When your friends at the Social Security Administration are determining your benefits, they are looking at 35 years of earnings. They calculate the annual average wage levels within that timeframe and index it to reflect inflation. Then they plug that figure into a formula to figure out your PIA…

4. Primary Insurance Amount (PIA)

This is the monthly retirement benefit you will receive at your full retirement age. Your PIA is shown on your yearly Social Security statement sent to everyone over 25 years old or at SSA.gov.

5. Summary Earnings Query (SEQY)

It is possible that the Social Security Administration has inaccurate earnings records for some citizens, given how many they must account for. Before you claim your benefit, make sure you request a Summary Earnings Query to verify your income history. (I have seen several clients with incorrect earnings histories, but we were able to amend their records before it was too late.)

6. Delayed Retirement Credits (DRC)

This is one of the most powerful tools for maximizing your benefits (though there is no single strategy that works for everyone). Once you reach your full retirement age, your monthly Social Security check will increase every year you wait to start receiving it — up to age 70. If your FRA is 66 and you delay benefits until 70, your benefits will increase by 32% total or 8% per year in addition to the annual COLA (see below). Therefore, if you were entitled to $1,000 per month at 66, you would get $1,320 at age 70. Waiting to claim benefits typically makes the most sense for those likely to live longest.

7. Cost of Living Adjustment (COLA)

Beginning in 1975, Congress indexed Social Security benefits for inflation to protect the purchasing power of your benefit. Your PIA is adjusted annually based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Earners (CPI-W).

It’s a good idea to commit to learning the language of Social Security to help avoid poor decisions. Once you’ve learned the language, it’s time to move on to claiming strategies. I possibly lost $1,000 because of my lack of car knowledge. That stung. But the stakes are much higher when it comes to Social Security. You may not want to rely solely on a search engine and, instead, seek credible help in making such important decisions.

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