Friday, May 20, 2022

How Can You Calculate Your Social Security Benefits

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North Carolina Social Security Disability Vs Supplemental Security Income Programs

How to Calculate Your Social Security Benefits

Social Security Disability and Supplemental Security Income are two separate programs with different eligibility criteria that serve two populations.

Social Security Disability Insurance provides payments to workers who have become disabled to such an extent they can no longer maintain gainful employment and earn income to support themselves. To qualify for SSD benefits, you have to have worked and paid into the program during five of the 10 years prior to becoming disabled. The amount of your benefit is based in part on your earnings.

Supplemental Security Income provides financial assistance to individuals who have very few financial assets and whose disability makes it impossible to work for a living. In most cases, SSI recipients have been disabled since birth or became seriously ill as children and have never been able to work. The program also serves disabled adults who never worked or did not work long enough to earn the work credits necessary to qualify for SSD. An additional segment of the SSI program serves people with financial need who are over age 65, or who are blind.

More people who receive disability benefits do so through the SSD program. Recipients of SSD payments are not yet 65 years old and have worked long enough to earn work credits that help determine the amount of their benefit.

Theres An Annual Social Security Cost

One of the most attractive features of Social Security benefits is that every year the government adjusts the benefit for inflation. Known as a cost-of-living adjustment, or COLA, this inflation protection can help you keep up with rising living expenses during retirement. The Social Security COLA is quite valuable its the equivalent of buying inflation protection on a private annuity, which can cost a pretty penny.

Because the COLA is calculated based on changes in a federal consumer price index, the size of the COLA depends largely on broad inflation levels determined by the government. In 2021, Social Security beneficiaries will see a 1.3% COLA in their monthly Social Security benefits.

The Kiplinger Letter forecast in March that the 2022 COLA would be 3%, which would be the largest increase since 2012 when Social Security benefits ticked up 3.6%.

Heres what COLAs have been in other recent years:

  • 2009: 5.8%
  • 2021: 1.3%

Spouses Survivors And Dependents

Spouses, survivors and qualifying dependents can collect Social Security benefits based on the primary insured’s PIA.

A spouse can claim 50% of the primary worker’s full PIA if they retire at the Normal Retirement Age or if they are caring for a qualified child. A spouse who is not caring for a qualified child and who retires after 62 but before their Normal Retirement Age will get reduced benefits down to a low of 32.5% of the primary worker’s benefit.

A qualifying child can claim up to 50% of a retired worker’s benefits or, if they are a surviving child, up to 75% of a deceased worker’s benefits. However, in cases where a family has multiple claimants , the combined family benefit is capped at between 150 – 180% of the primary worker’s benefits.

Finally, a surviving spouse who has reached their Normal Retirement Age can opt to collect their deceased spouse’s benefits instead of their own. In this case, they will receive 100% of the primary worker’s benefits. A younger widow/widower who is caring for a qualified child can collect 75% of the primary worker’s benefits.

You can only collect under one benefits program. Any beneficiary who qualifies for multiple sources of income will receive the higher of their qualifying benefits.

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Your Social Security Benefits Will Be Taxed

Most people know that you pay tax into the Social Security Trust Fund throughout your career, but did you know that you may also have to pay tax on your Social Security benefits once you start receiving them? Benefits lost their tax-free status in 1984, and the income thresholds for triggering tax on benefits haven’t been increased since then.

As a result, it doesn’t take a lot of income for your Social Security benefits to be pinched by Uncle Sam. For example, a married couple with a combined income of more than $32,000 may have to pay income tax on up to 50% of their Social Security benefits. Higher earners may have to pay income tax on up to 85% of their benefits.

You may also have to pay state income taxes on your Social Security benefits. See our list of the 13 States That Tax Social Security Benefits.

Calculating Ssdi: Covered Earnings

Managing Your Social Security Benefits

If you are eligible for SSDI benefits, the amount you receive each month will be based on your average lifetime earnings before your disability began. This is the only factor that determines your benefit amount, although it may be reduced if you’re receiving disability payments from other sources . In other words, your SSDI benefit amount is not based on how severe your disability is, and unlike SSI, you cannot be denied SSDI because you have too much unearned income or too many resources .

Your past earnings must be covered under the Social Security program in order to count towards the amount of SSDI benefits you will receive. “Covered earnings” are wages you have received from jobs that have paid into Social Security. If you have received a paycheck that had money withheld for “Social Security taxes” or “FICA,” the wages you made at that job are covered earnings and will count toward calculating your benefit amount. Most wages are covered earnings.

Your SSDI payment will be based on your average covered earnings over a period of years, known as your average indexed monthly earnings . A formula is then applied to your AIME to calculate your primary insurance amount the basic figure the SSA uses in setting your actual benefit amount.

For example, someone in their fifties who made $100,000 for the past few years might expect a disability payment of $2,500 per month. Someone in their fifties who made $60,000 per year might expect a disability payment of $2,000 per month.

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Now You Know How The Social Security Benefit Formula Works

Now you know exactly how the Social Security benefit formula works. To sum it all up:

So, while the Social Security benefits formula may seem simple since you’re just adding up different percentages of your average earnings over 35 years depending how much you earn, there’s obviously a lot more to applying the formula than first meets the eye.

Social Security Calculation Step : Aime Calculation

Now, all you have to do is extract the highest 35 years of indexed earnings.

If youre still working and dont have 35 years, youll need to estimate what your future earnings will be and apply the indexing factors just as you would for actual historical earnings. This is where you can start to play around with the numbers to see the various impacts of retiring early, or working later or maybe having variable earnings close to retirement.

Once you have your highest 35 years in the last column, you just need to sum them up and divide by 420. You divide by 420 because thats the number of months in 35 years and we need to get your average earnings expressed as a monthly number.

Once you do this, congratulationsyou have your AIME and have finished the first step of the calculation. Its downhill from here.

NOTE: If you die before accumulating 35 years of earnings, there is an alternate calculation. See my article If You Die Early: How To Calculate Social Security Survivors Benefits.

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How To Estimate Your Social Security Income

Two facts are knownSocial Security benefits are not guaranteed, and some changes will be necessary to keep the system solvent in the future as millions of baby boomers retire and begin to receive their Social Security benefits. While these facts add uncertainty, its also true that the quality of your retirement depends on your planningand you must start planning somewhere.

A good starting point is to figure out the amount of retirement benefits to which all of your years of Social Security contributions entitle you under current law. There are four ways to do this:

  • You can visit a local Social Security office to get a record of your taxed Social Security earnings and an estimate of retirement benefits .
  • You can visit the Social Security website and use one of its online benefit calculators to determine your retirement estimate based on your earnings record.
  • You can wait until you decide to start receiving benefits and let the SSA calculate the amount for you. However, this doesnt help you plan ahead, and while the SSA can usually be counted on to determine benefits accurately, mistakes can be made.
  • You can calculate your own benefits using the step-by-step process described in this article. Once you understand a few basic concepts, its not that difficult. One advantage of calculating your own benefits is that you can make decisions and consider trade-offs, such as whether you can afford to retire early or how much you can increase your benefits by continuing to work.
  • Apply The Social Security Benefits Formula To Aime

    How To Calculate Social Security Benefits [3 Easy Steps]

    Once you know your AIME, put it into the Social Security benefits formula using the bend points in effect in the year that you turn 62. The table below shows the bend points that have applied in recent years:

    Year

    If you turn 62 in 2019, the bend points to use in your Social Security benefits formula are $926 and $5,583. So, if your AIME was $6,190.48 as calculated above, here’s how your benefits would be calculated:

    • 90% of $926 = $833.40
    • 15% of $6,190.48-$5,583 = $91.12

    Your primary insurance amount would be $833.40 + $1,490.24 + $91.12 = $2,414.76.

    If you turned 62 in 2018, different bend points apply: $895 and $5,397. So, if your AIME was $6,190.48, your primary insurance amount in 2018 would be $2,365.16:

    • 90% of the first $895 = $805.50
    • 32% of $5,397-$895 = $1,440.64

    $805.50 + $1,440.64 + $119.02 = $2,365.16.

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    Apply The Social Security Benefit Formula

    Once the Social Security Administration has your AIME, it plugs it into the applicable Social Security benefit formula. Here is the formula for 2021:

  • Multiply the first $996 of your AIME by 90%.
  • Multiply any amount between $996 and $6,002 by 32%.
  • Multiply any amount over $6,002 by 15%.
  • Total your results from Steps 1 to 3 and round down to the nearest $0.10.
  • In this example, $996 and $6,002 are known as the bend points. These change annually to account for inflation, and that’s what sets one benefit formula apart from another. The formula the Social Security Administration uses to calculate your benefit is the one for the year you turned 62. This is true even if you don’t claim benefits until much later.

    The result from this step is known as your primary insurance amount . Returning to our example of a $4,167 AIME from the step above, we’d end up with a PIA of $1,911 if we used the benefit formula above.

    That’s how much you’d get if you signed up for Social Security at your full retirement age . Your FRA is 66 if you were born between 1943 and 1954. Then, it rises by two months every year thereafter until it reaches 67 for those born in 1960 or later.

    You don’t have to sign up right at your FRA if you don’t want to, but if you don’t, Social Security runs another calculation that decides how much you get per month.

    Calculate My Social Security Income

    These days thereâs a lot of doom and gloom about Social Securityâs solvency – or lack thereof. And regardless of whether you think Social Securityâs future is secure, the fact remains that you shouldnât plan on living exclusively off your Social Security benefits. After all, Social Security wasnât designed to make up a retireeâs entire income.

    Still, many people do find themselves in the position of having to live off their Social Security checks. And even if you have other income sources in retirement, Social Security can make up a significant part of your retirement income plan. That’s why itâs important to know all the rules surrounding eligibility, benefit amounts, taxation and more.

    Do you need help managing your retirement savings? To find a financial advisor near you, try our free online matching tool.

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    Social Security Benefits For Surviving Spouses

    If your spouse was receiving Social Security benefits upon their death, you must report the death as soon as possible. You can call the Social Security Administration at 1-800-772-1213 between 7 a.m. and 7 p.m. on weekdays or visit your local Social Security office in person.

    You are eligible for a one-time, lump-sum death benefit of $255 from Social Security if:

    • You were receiving benefits on your spouses record at the time of death, or
    • If you were living in the same household as your spouse at the time of death.

    Any benefits received in the name of your spouse during the month of death or later must be returned to the Social Security Administration as soon as possible.

    If your spouse worked long enough under Social Security, you may be eligible for Social Security benefits. You must be age 60 or older or disabled and 50 or older to qualify.

    How much youll receive depends on the percentage of your spouses benefit as well as your age and the type of benefit youre eligible for.

    You must apply for survivor benefits in person. You can call Social Security at 1-800-772-1213 to request an appointment.

    How Your Ssdi Payments Are Calculated

    Squad Timing

    The severity of your disability will not affect the amount of SSDI benefits you receive. The Social Security Administration will determine your payment based on your lifetime average earnings before you became disabled. Your benefit amount will be calculated using your covered earnings. These are your earnings at jobs where your employer took money out of your wages for Social Security or FICA.

    Your SSDI monthly benefit will be based on your average covered earnings over a period of time, which is referred to as your average indexed monthly earnings . The SSA uses these amounts in a formula to determine your primary insurance amount . This is the basic amount used to establish your benefit.

    SSDI payments range on average between $800 and $1,800 per month. The maximum benefit you could receive in 2020 is $3,011 per month. The SSA has an online benefits calculator that you can use to obtain an estimate of your monthly benefits.

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    Your Disability Payment Is Based On Your Average Lifetime Earnings Before You Became Disabled The Severity Of Disability Does Not Factor In Although Payments From Other Sources Can

    Unlike Supplemental Security Income , which also pays benefits to people who are disabled and unable to work but is based on limited income and resources, SSDI requires that you have worked and paid Social Security taxes for a certain length of time.

    The average SSDI payment is currently $1,277. The highest monthly payment you can receive from SSDI in 2021, at full retirement age, is $3,148. This article covers how the monthly benefit is calculated.

    Social Security Calculation Step : Adjust For Filing Age

    The easy way to look at it is to think about it in annual numbers.

    Your benefit will be lower if you file at 62 and higher if you file at 70.

    If you file after your full retirement age, your benefit will increase by 8% per year. If you file in the 3 year window immediately prior to your full retirement age your benefit will decrease by 6.66% per year of early filing. For anything more than 3 years before your full retirement age, your benefit will decrease by an additional 5%.

    A lot of people dont want to retire on their birthday so its important to break this down by a monthly amount.

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    Tips For Navigating Social Security

    • A financial advisor can help you account for the various sources of retirement income, including Social Security benefits. SmartAssets free financial advisor matching tool can pair you with up to three advisors in your area. Get started now.
    • If youre applying for Social Security disability benefits, youll need to fill out form SSA-827. This provides your consent for the SSA and Disability Determination Services to view your medical records.
    • Dealing with a disability, either temporary or permanent, is hard enough without considering the financial impact. Having an emergency fund in place for unpredictable things like this can be a huge relief.

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    Learn More About Social Security

    Video: How To Calculate Social Security Benefits

    The rules around Social Security can vary from very simple to fairly complicated. Our special coverage in Fidelity Viewpoints® includes topics such as working while retired, taxes, and more.

    In our special video series, a Fidelity professional answers some of the most commonly asked customer questions about Social Security.

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    Check The Social Security Administration’s Math

    Your statement includes a record of the earnings on which you’ve paid taxes and an estimate of the benefits you will receive at various retirement ages: 62, 67, and 70. It is always wise for you to check the SSA’s numbers. Don’t be surprised if you uncover an error. Some government-watchers estimate that the SSA makes mistakes on at least 3% of the total official earnings records it keeps.

    When you check your record, make sure that the Social Security number noted on your earnings statement is your own, and make sure the earned income amounts listed on the agency’s records mesh with your own records of earnings as listed on your income tax forms or pay stubs.

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