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How Do They Calculate Your Social Security Benefits

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How to Calculate Your Social Security Benefits

Certain factors can change the amount to which you are entitled, such as electing to receive benefits before full retirement age or delaying benefits past the full retirement age. Government workers receiving pension benefits may not be eligible to receive Social Security.

You get a reduced benefit if you claim benefits early, and you get a higher benefit if you delay claiming benefits up to age 70.

Claiming Social Security early results in a permanent pay cut from what your benefit would be at full retirement age, warns Greg McBride, CFA, Bankrates chief financial analyst.

Better still is that each year you delay Social Security after your full retirement age and up until age 70 results in an 8 percent increase a permanent pay raise, if you will, above the benefit youd have received at full retirement age, McBride says.

Social Security calculations can be complicated, but understanding how your benefit is determined can help you plan for retirement.

You also can estimate your benefits by using the SSAs Social Security Retirement Estimator.

Its a good idea to go to the SSA website and create an account so you can get your Social Security statement online. Go to www.socialsecurity.gov/myaccount to review your statement.

Social Security Calculation Step : Adjust All Earnings For Inflation

So lets jump in with calculating your AIME. To do this, youll need to get use a notepad or a tool like Excel/Google Sheets.

Youre going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.

The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says view earnings record. If you dont have an online account, its very easy to set one up.

This may seem a little redundant to put the year and your age, but itll make another step a little easier.

Now you just need to copy down the information from the SS earnings history. Youll want to use the part that says your taxed Social Security earnings. Dont skip a year, even if there were no earnings. Just put a zero in.

Once you have all of your historical earnings recorded, its time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.

Important note hereonly your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.

Ssi Benefits For Children

Supplemental Security Income is a separate program for Americans with limited incomes and few other resources. Recipients must generally be 65 or older, blind, or disabled. But SSI is also available to children under age 18 in certain cases. To qualify for SSI benefits:

  • The child must have a physical or mental impairment that results in marked and severefunctional limitations.
  • The impairment or impairments must have lasted or be expected to last for a continuous period of at least 12 months or be expected to result in death.

In the case of blindness, that duration requirement doesn’t apply.

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What Is The Future Of Social Security

Social Security is expected to run out of cash reserves in 2034, according to the Old-Age and Survivors Insurance Trust Fund, the retirement benefits account managed by the Social Security Administration.

However, this doesnt mean the program would be bankrupt and unable to pay out benefits. If Congress does nothing to reform the system by 2034, Social Security would still be able to pay 79 percent of promised benefits until 2090.

Social Security has run out of cash reserves before. Congress reformed the program in the 1980s by taxing benefits based on income levels and by gradually increasing the full retirement age from 65 to 67.

Is My Social Security Income Taxable The Quick Answer

Social Security Benefits For Spouses

According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income .

If your combined income is above a certain limit , you will need to pay at least some tax.

The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.

Also Check: How To Find Out My Current Social Security Benefits

Why Estimate Your Social Security Benefits

When youre planning for retirement, figuring out how much youll receive from Social Security is an important part of determining your complete financial picture. Depending on your situation, you also may be interested in estimating divorced spouse benefits, survivor benefits, and disability benefits as well. Getting an accurate number is important, so take care to avoid overlooking or overstating the value of your Social Security benefits.

While predicting the future of Social Security is difficult because of questions about its solvency mean it may change in the future. Its more likely that the younger and more financially well off you are, the more changes will affect you. But keep in mind that even if you plan to retire in the next few years, Social Security was never meant to be a retirees sole source of income. As President Dwight D. Eisenhower famously said: The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built. Determining your Social Security benefits now helps to create an effective long-term retirement strategy and to understand benefits that might protect your family if you or your spouse dies or becomes disabled.

Your Pia Is Comprised Of

  • 90% of the first $996 of your AIME
  • 32% of any amount over $996 up to $6,002
  • and 15% of any amount over $6,002

Age of claim If you decide to claim Social Security before you reach full retirement age the size of your monthly entitlement will decrease. This is done on a sliding scale, with more than a quarter of the payment size being lost if you claim at the age of 62. Alternatively, if you delay the payment until you are 70 you can add up to 30% to your payment amount.

How to calculate your Social Security entitlement

The process for calculating your Social Security monthly payments can be a confusing one and picking the opportune moment to claim the benefits can be crucial for your long-term financial stability.

Fortunately, the SSA provide two easy-to-use online tools which allow you to check both the earnings history and estimate your future Social Security entitlement.

More same sex couples will now be able to receive Social Security survivors benefits if one of the partners dies. Previously, the surviving spouse or partner was eligible only if the couple had been married for nine months.

Recommended Reading: How To Find Out My Current Social Security Benefits

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.

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Also Check: How To Find Out My Current Social Security Benefits

Substantial Gainful Activity Sga

is an important concept to understand when pursuing Social Security Disability Insurance or Supplemental Security Income. The Social Security Administration defines it as the performance of significant mental and/or physical duties for profit.

SGA maximum amounts are set by the Social Security Administration and change regularly. If the SSA determines that your income is below the SGA maximum amount, you are financially eligible for disability payments. A higher SGA maximum amount is always set for blind individuals.

Your specific SGA income is calculated based on your gross earnings or your wages before taxes are taken out by the SSA. Impairment related work expenses are subtracted from the calculation, and you should not assume that you do not qualify for SSDI just because you earn a certain amount that exceeds the current SGA maximum.

It is important to note that SGA amounts change on a regular basis based on the national average wage index.

For more information on calculating your SGA income, you can contact your local Social Security field office to determine whether or not you meet the threshold with your current income and disability related expenses.

How Is Social Security Calculated

There is a three-step process used to calculate the amount of Social Security benefits you will receive.

Step 1: Use your earnings history to calculate your Average Indexed Monthly Earnings .Step 2: Use your AIME to calculate your primary insurance amount .Step 3: Use your PIA, and adjust it for the age when you will begin receiving benefits.

You can use a copy of your Social Security statement that provides your earnings history to plug your own numbers into the formulas below.

Also Check: Social Security Benefits In Usa

Your Ssdi Amount Can Be Reduced From Other Disability Payments

If you receive payments from a long term disability insurance policy, your SSDI payments will not be affected. However, payments from other government run disability programs such as state disability benefits or workers comp payments can reduce your SSDI payments.

If your earnings from government run disability programs like workers comp combined with your SSDI earnings exceed 80% of your average income before you became disabled, your SSDI payments will be reduced.

VA and SSI benefits do not reduce your SSDI benefits, however your SSDI benefits can reduce your SSI benefits.

Financial Eligibility for Social Security Disability

The financial eligibility requirements for SSDI and SSI differ. In order to receive SSDI, the prospective recipient must be able to demonstrate they have a disability that is medically determinable, that will continue to last no less than twelve months, and that prevents the individual from engaging in substantial gainful activity.

Fact #: Social Security Is Particularly Important For People Of Color

Can You Count on Social Security?

Social Security is a particularly important source of income for groups with low earnings and less opportunity to save and earn pensions, including Black and Latino workers and their families, who face higher poverty rates both during their working lives and in old age. The poverty rate among Black and Latino seniors is over 2.5 times as high as for white seniors. There is a significant racial retirement wealth gap, leading seniors of color to face more retirement insecurity than white seniors. African American and Latino workers are less likely to be offered workplace retirement plans and likelier to work in low-wage jobs with little margin for savings. Social Security helps reduce the economic disparities between white seniors and seniors of color.

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How Are Supplemental Security Income Benefits Calculated

SSI benefits are much simpler to calculate than SSDI. The SSA starts with what is called the Federal Benefit Rate or FBR. The FBR changes periodically to account for inflation and the cost of living. In 2017, the FBR is $735. This is maximum amount of SSI you can collect each month.

Then, the SSA simply deducts your countable unearned income and your countable earned income from the $735 to determine your monthly SSI benefit amount.

The SSA counts various types of income against your benefit amount, including:

  • Wages and other money you earn from working
  • Certain types of payments you receive, such as alimony, child support, or veterans benefits
  • In-kind income, which is money family or friends pay towards your housing, food, and other essentials
  • A portion of the income earned by others people in your home, such as your spouse

Not all income counts, though. The SSA ignores various types and sources of income including:

  • Your $20 each month of most income
  • Your first $65 of earned income and one-half of earned income thereafter
  • Food stamp benefits

A Complex Weighted Formula Is Used To Calculate Your Disability Benefits

Every SSDI recipient receives a unique amount of money. Your SSDI benefits are based on the income that you have paid Social Security taxes on in the past. This income is called your covered earnings. The average of your covered earnings over several years is called your average indexed monthly earnings .

You can view your covered earnings history by visiting www.ssa.gov/mystatement or you can check your Social Security statement which is sent every five years to those under the age of 60.

The more money that you have earned and paid Social Security taxes on, the higher the amount that you are eligible to receive in disability payments. However, it is important to note that there are maximums in place in spite of the applicants earnings. The maximum benefit as of 2015 is $2,663 per month, and most people receive between $1000 and $1200 per month in benefits on average.

Once your AIME is calculated, a formula is applied to your AIME to calculate your primary insurance amount . Using your PIA, the Social Security Administration can calculate your monthly benefit amount.

This may seem complicated, and you are not expected to calculate your disability benefits on your own. You can contact the SSA or your local Social Security office to get an accurate estimate of your potential monthly benefits for SSDI. A representative will ask you questions about your past earnings and other relevant questions and calculate your estimated benefit for you.

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How Are Social Security Survivor Benefits Calculated For Widows And Widowers

If someones spouse or ex-spouse dies and had earned benefits higher than the living spouse, then that survivor may be eligible for survivors benefits.

How much someone receives in survivor benefits depends on the lifetime earnings of the deceased worker and whether they claimed Social Security before they passed. If the deceased hadnt yet claimed Social Security benefits, their survivor could be eligible for a percentage of the benefit the deceased would have received at full retirement age. If the deceased did not claim benefits and lived past their full retirement age, the survivors benefit will be higher because the deceased would have earned delayed retirement credits.

However, if the deceased had started benefits before their death, their survivors will receive a percentage of the actual benefit the deceased worker received. How much they will receive varies depending on exactly what age the deceased claimed their benefits.

Moreover, if a survivor claims this benefit before their survivors full retirement age, the benefits are reduced by a percentage based on their birth year.

The precise percentage of benefits a survivor receives is as follows:

How Are Social Security Disability Insurance Benefits Calculated

How is my Social Security benefit calculated?

SSDI is a benefit for disabled workers who have sufficiently paid into the Social Security system over the course of their employment. You must have earned a certain number of work credits to qualify for benefits if you become disabled before retirement age. The exact number of credits you need depends on your age. The older you are, the more credits you need.

Once the SSA confirms that you have enough credits to qualify, it will then calculate how much your monthly benefit should be. The formula that the SSA uses is considerably complex. There are two primary variables that affect your SSDI benefit amount:

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Spousal Benefit Reduction Due To Early Entitlement

If you file for a spousal benefit prior to your full retirement age, that spousal benefit will be reduced due to early filing. The reduction is 25/36 of 1% for each month early, up to 36 months. For each month in excess of 36 months, the reduction is 5/12 of 1%.

Example : Bobs full retirement age is 67. Bob files for his retirement and spousal benefits at age 65 . As a result, his spousal benefit will be reduced by or 16.67%.

The final calculation of Bobs spousal benefit will be 83.33% x . And to that, we would add Bobs own retirement benefit to find the total amount of his monthly benefit.

Social Security Calculation Example

Take someone who turned 62 in 2018. He has worked since he was 32 and each year earned an inflation-adjusted income of $60,000. His AIME would be:

  • $80,000 x 30 + $0 x 5 = $2,400,000
  • $2,400,000 / 35 = $68,571
  • $68,571 / 12 = $5,714

Since our sample recipient has turned 62 this year, benefits will be fixed to the 2018 bend points even if he doesn’t retire until 67. His PIA would therefore be:

Don’t Miss: How To Find Out My Current Social Security Benefits

The Impact Of Roth Iras

If youre concerned about your income tax burden in retirement, consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Because you pay taxes on the money before contributing it to your Roth IRA, you will not pay any taxes when you withdraw your contributions. You also do not have to withdraw the funds on any specific schedule after you retire. This differs from traditional IRAs and 401 plans, which require you to begin withdrawing money once you reach 72 years old, or 70.5 if you were born before July 1, 1949.

So, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA wont count as part of that income. That could make a Roth IRA a great way to increase your retirement income without increasing your taxes in retirement.

Another thing to note is that many retirement plans allow individuals, aged 50 years or older, to make annual catch-up contributions. For 2021, you can make catch-up contributions up to $1,000. These must be made by the due date of your tax return. You have until April 15, 2022 to make the $1,000 catch-up contribution apply to your 2021 Roth IRA contribution total.

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