Social Security benefits are an important source of income for many retirees. But how much you receive each month depends on your lifetime earnings and when you start taking benefits. For those earning around $25,000 annually, your Social Security checks may be reduced based on your income. Here’s what to know about how much Social Security you could get with $25,000 in annual earnings.
How Social Security Benefits Are Calculated
Your Social Security benefit is based on your average monthly earnings over your 35 highest-earning years. Specifically, the Social Security Administration (SSA) calculates your basic benefit, or primary insurance amount (PIA), using a formula that accounts for your:
- Highest 35 years of earnings
- Average monthly earnings during those years
- Adjustments for growth in average national wages
This PIA is then adjusted based on when you start claiming benefits, between age 62 and 70. Claiming before your full retirement age (currently age 66-67) permanently reduces your monthly benefit. Delaying increases your benefit by up to 8% per year until age 70.
So for a $25,000 annual salary, the SSA would calculate your average monthly indexed earnings over your top 35 years. This monthly average then gets plugged into the PIA formula to determine your base benefit amount at your full retirement age.
How Earnings Can Reduce Social Security Benefits
While you are working and collecting Social Security prior to your full retirement age, your benefits may be lessened through Social Security’s retirement earnings test.
In 2023, if you are younger than full retirement age for the entire year, $1 in benefits will be deducted for every $2 you earn over the annual limit of $21,240.
For example, if you earn $25,000 from a job or self-employment, you’d be $3,760 over the limit ($25,000 – $21,240). So your Social Security benefits would be reduced by about $1,880 for the year ($3,760/2).
Benefits are recalculated each year based on your earnings. Once you reach full retirement age, there is no limit on earnings and your monthly benefit would be adjusted to your full PIA amount.
Estimating Your Benefit with $25,000 in Earnings
The easiest way to estimate how much you can expect to receive in Social Security based on $25,000 in annual earnings is to use the SSA’s Retirement Estimator tool. This uses your actual Social Security earnings record to give you a personalized estimate.
If you want a quick estimate, you can use the SSA’s Online Quick Calculator. This won’t use your actual earnings history but allows you to enter your expected future earnings and get an estimate.
For example, using the Quick Calculator, let’s assume:
- You are age 40 today
- You made $25,000 last year and expect the same income until retirement
- You plan on retiring at your full retirement age of 67 in 20 years
The Quick Calculator provides an estimate of your monthly benefit at age 67 of $1,830 if you earned $25,000 annually over your working career.
However, because you are earning over the limit before your full retirement age, your actual benefit in the years prior to age 67 would be around $1,886 per month with the earnings test reduction factored in.
- $1,886 per month if claiming benefits anytime from age 62 to 66
- $1,830 per month if claiming benefits at age 67
Just keep in mind that actual benefits depend on your lifetime earnings history. The estimates will likely change as you get closer to retirement based on your exact earnings record.
Tips to Maximize Social Security with Earnings of $25,000
Here are some tips to help maximize your Social Security if you consistently earn around $25,000 annually:
Claim at full retirement age or later – Waiting until your full retirement age or even age 70 allows you to avoid the earnings test and get a larger monthly benefit.
Minimize income in early retirement years – Try to reduce your earnings as much as possible in the years leading up to your full retirement age to avoid bigger reductions.
Wait to claim spousal benefits – If you qualify for benefits based on your spouse’s record, wait until full retirement age to claim spousal benefits to avoid earnings test reductions.
Use tax strategies – Up to 85% of your benefits may be taxed if half your income plus benefits exceed certain thresholds. Consider withdrawals from Roth accounts which don’t count towards these limits.
Plan your application date – Since the earnings test is based on calendar years, you may want to delay applying for benefits until later in the year you reach full retirement or age 70. This allows you to earn more in that year before starting your higher benefit.
Check your earnings record – Verify your entire earnings history with the SSA to correct any errors that could reduce your monthly benefit. Higher lifetime earnings boost your benefit.
Consider working longer – Additional earnings in your late 60s can increase your benefit since Social Security averages your highest 35 earning years.
Understanding how benefits are calculated and how your earnings impact Social Security is crucial to maximizing your monthly payments in retirement. With some planning, you can help ensure your Social Security checks will provide as much income as possible, even with moderate annual earnings around $25,000.
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