There’s a lot of confusion about Social Security. In a recent survey, about a quarter of Baby Boomers said their Social Security benefits were lower than they expected. We’ll answer some of your questions about how Social Security works and how to get the most out of it. Financial advisor Brad Allen joins WTMJ with the details below:

It’s not a simple calculation – less than 10% of people understand how Social Security benefits are calculated. Here’s how it works:

  • It starts with your earnings over your career, which are adjusted for inflation in a process called wage indexing.
  • Social Security takes into account the 35 years you earned the most. If you don’t have 35 years of earnings, a zero will be added in, decreasing your average.
  • Your average monthly pay over those 35 years is calculated – that is your Average Indexed Monthly Earnings (AIME).
  • Next, the formula applies multipliers that adjust your benefit. These are called “bend points,” and they are designed so that low income earners get a higher proportion of income replaced than high income earners.
  • These “bend points” are adjusted each year based on the year you turned 62. For example, if you retire in 2018:
    You’ll get credit for 90% of your income up to $895 per month.
    You’ll get credit for 32% of your income between $895 and $5,397.
    And you’ll get credit for 15% of your income over $5,397.

How Much Is the Average Retiree Collecting in Social Security?
The average benefit is $1,404 per month in 2018, but the actual number depends on several factors that we just went over, like your work history and when you file for benefits.

Is That Enough to Live Off During Retirement?
Many people mistakenly believe they will be able to live off their Social Security benefits in retirement. But Social Security is only designed to replace about 40% of your income, and most people will need at least 80% of their pre-retirement income to maintain the lifestyle they want in retirement. I say “at least” because you may exceed that 80% if you plan to travel or spend a lot dining out and on entertainment in retirement. Another big retirement expense is healthcare. Retirees with large medical bills may also find themselves needing more than 80% of their pre-retirement income.

What is My Full Retirement Age?
Many people think of age 65 as full retirement age, or (FRA). That may or may not be true. Your FRA is calculated based on the year you were born. For many years, it was age 65. However, FRA starts gradually increasing for people born in 1938 or later. FRA continues increasing until it reaches age 67 for anyone born after 1959. You can file for Social Security benefits as early as age 62, but your benefit will be permanently reduced by as much as 25%. There is a big bonus for delaying your claim beyond your full retirement age: your benefit will grow by as much as 8% each year from your full retirement age up until age 70. There is no benefit to waiting past age 70 to file.

Can I Work and Collect Social Security Benefits?
Yes – you can collect Social Security benefits while you’re working. Once you’ve reached Full Retirement Age, you will get your full benefits. However, if you haven’t reached Full Retirement Age and you earn more than $17,040, your benefits will be temporarily reduced. If you will reach Full Retirement Age this year, your income limit increases to $45,360. That money is not lost, however. Your benefits will increase once you reach Full Retirement Age.

Can I Get a Do-Over?
Yes – you can withdraw your benefits claim as long is it’s within one year of when you filed. You will have to pay back everything you’ve received from Social Security. If you withdraw your claim, your benefits will be stopped and you can claim later when your benefits will be higher.

What is the Future of Social Security?
There’s been a lot of talk about the future of Social Security, and in a recent survey, more than three-quarters of workers said they were worried about Social Security running out of money in their lifetime. Here’s why: Americans are living longer and having fewer kids, which means people are collecting Social Security longer, and there aren’t as many workers paying into the fund. While it’s true that Social Security funds are expected to run out between 2033 to 2037, that doesn’t mean benefits will cease. At that time, they would likely shrink by about 25%. My message to clients is Social Security will likely be around in some form, but we don’t know exactly what it will look like. We factor Social Security into the retirement plans we make, but our plans do not rely heavily on it.


Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Drake & Associates does not offer tax or legal advice.