Adjust Your Wages For Inflation
The Social Security Administration uses the Average Wage Index to adjust wages for inflation. The average wage index is a measure of U.S. wages. The AWI that applies to adjust your wages for inflation is the AWI in effect two years before you become eligible for Social Security. You become eligible for Social Security at 62, so you’re subject to the AWI in effect in the year you turn 60.
The table below shows the AWI for the past several years — and you can find a complete list of AWIs dating back to 1951 on the Social Security Administration website.
Table source: Social Security Administration.
If you turned 62 in 2019, you’d use the 2017 AWI — $50,321.89 — to determine how to adjust each year’s wages for inflation. The formula to adjust your wages requires you to:
- Divide the AWI in effect the year you turn 62 by the AWI in effect in the year you’re adjusting the wages for. This will give you the indexing factor.
- Multiply the relevant year’s wage by the indexing factor to determine your inflation-adjusted wage.
Here’s how this formula works in practice:
Do this math for each year you have earnings to figure out that year’s index-adjusted wage.
The Social Security Administration also lists indexing factors on its website for the current eligibility year. You can look up the indexing factors that apply and multiply each year’s indexing factor by the relevant year’s wages. This will give you your index-adjusted wage for every year you worked.
Are There Retirement Benefits For My Family Members
Once you start collecting Social Security, other family members may be entitled to collect benefits as well, based on your work history. If youve been married for at least one year, your spouse may be entitled to collect spousal benefits. Under certain conditions, your children may also be entitled to benefits.
There is a limit on the amount of benefits that family members receive on the earnings record of one worker. The limit varies between 150% and 188% of the workers PIA. If the total benefits owed to your spouse and children push your familys benefits above the limit, their benefits will be reduced proportionately to bring the total within the limit. Your benefits will not be affected. Any benefits payable to an ex-spouse arent included in the family maximum.
Will A Government Pension Impact My Retirement Benefits
If you worked for an employer that didnt withhold FICA taxes from your salary, such as a government agency, the pension you receive based on that work may reduce your Social Security retirement benefits. This reduction, as part of the windfall elimination provision , affects individuals who earned a pension in any job where FICA taxes werent paid and who worked in other jobs long enough to qualify for Social Security retirement benefits.
In addition to a reduction in individual benefits, spousal and/or survivor benefits may also be reduced accordingly. In this case, Social Security benefits will be reduced by two-thirds of the government pension.
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How Are Social Security Survivor Benefits Calculated
To understand Social Security benefit calculations, you first need to understand one piece of jargon: primary insurance amount . A persons primary insurance amount is the amount of their monthly retirement benefit, if they file for that benefit exactly at their full retirement age.
If your spouse has died and you file for a benefit as their survivor, your benefit will depend on:
- Your deceased spouses PIA,
- Whether your deceased spouse had already filed for his/her retirement benefit ,
- The age at which your spouse died, and
- The age at which you file for your benefit as a surviving spouse.
Lets first assume that you have reached your survivor full retirement age by the time you file for your survivor benefit.
If your spouse had not filed yet for his/her own retirement benefit by the time he/she died, then:
- If your spouse died prior to his/her full retirement age, your benefit as a surviving spouse will be your deceased spouses PIA.
- If your spouse died after reaching his/her full retirement age, your benefit as a surviving spouse will be whatever he/she would have received as a retirement benefit, if he/she had filed on his/her date of death.
If your spouse had filed for his/her own retirement benefit by the time he/she died, then your benefit as a surviving spouse will be the greater of:
- The amount your deceased spouse was receiving at the time of his/her death, or
- 82.5% of your deceased spouses PIA.
Effect Of Late Retirement On Benefits
1.Represents Full Retirement Age based on DOB Jan. 2, 1955
2.PIA = The primary insurance amount is the basis for benefits that are paid to an individual
To review your situation, your annual Social Security statement will list your projected benefits at age 62, full retirement age, and age 70, assuming you continue to work and earn about the same amount until age 62, full retirement age, or age 70 before retiring. If you need a copy of your annual statement, you can request one from the Social Security Administration .
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Theres A Social Security Spousal Benefit
Marriage brings couples an advantage when it comes to Social Security. One spouse can take what’s called a spousal benefit, worth up to 50% of the other spouse’s Social Security benefit. For example, if your monthly Social Security benefit is worth $2,000 but your spouse’s own benefit is only worth $500, your spouse can collect a spousal benefit worth $1,000 — bringing in $500 more in income per month.
Just as the benefit based on your own work history is reduced if you claim it early, the same is true for a spousal benefit. That 50% figure is the maximum amount that only a spouse who is at least full retirement age is eligible for. Taking the spousal benefit early at, say, age 62, reduces the amount to as little as 32.5% of the higher earners benefit. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.
How Inflation Impacts Your Pia
Your PIA is calculated at age 62. If you wait beyond age 62, cost-of-living adjustments will be applied to your PIA for each year afterward.
If you have already had most of your 35 years of earnings, and you are near age 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cos- of-living adjustments. Many people do not account for this when doing their own calculations, which can lead them to think that taking Social Security early is a better deal, when waiting is often the better deal.
In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits.
|Effect of Age on Claiming Benefits|
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Back Payments And Retroactive Payments Are Often Included Once You Are Approved
When you are approved for SSDI or SSI, you are often approved with back payments or retroactive payments included. Back payments are any disability benefits that are past due, or the benefits that you would have been paid if your initial application was approved right away.Retroactive payments are for the months that you were disabled and could not work. You are eligible for retroactive payments only with SSDI and not SSI.
How Is Your Benefit Calculated
Social Security actually calculates your benefit based on the monthly average of your 35 highest earning years, not your last five years nor your highest three years, said Czarnowski. And if you dont have 35 earning years, zeros get plugged into the calculation, and that lowers your monthly average and, in effect, lowers your benefit.
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What Percentage Of Social Security Is Taxable In 2022
The maximum percentage of your Social Security benefits that is taxable in 2022 remains 85% of your social security income.
The social security tax rate on your income remains the same with 6.2% being charged to the employer and 6.2% being withheld from the employee. The social security limit for 2022 is $147,000 which means that the absolute maximum amount that you can pay on social security taxes is $9,114.
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.
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Start Thinking About Your Retirement Benefits Now
It isnt easy when you are young to imagine yourself old, but if you can make that mental leap you will be far ahead of your peers. The effort you put into contemplating your future relationship with the Social Security Administration will pay off in spades when you reach the end of your working life. As an American, you are entitled to Social Security. Make it work for you!
Your Monthly Benefits For Ssi
Calculating your monthly benefits for SSI is simple. If you meet the qualifications as described below, and your application for SSI is approved, you will receive benefits of $733 per month or $1,100 per month , minus a portion of your current income.
The federal amount for SSI is set in January of every year. You may receive an additional payment on top of your SSI benefits called a State Supplementary Payment. The availability of this program varies from one state to another.
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Check Your Benefit Estimate Too
Checking your estimated Social Security benefit on your statement is another useful exercise, according to Czarnowski.
At one time, Social Security only informed you what your estimated benefit would be at three different ages: 62, your full retirement age and 72. The new statement is much more useful. It provides estimates of your monthly benefit at each age, from 62 to 70, including your full retirement age.
People have a better sense of what they can get from Social Security at different ages, said Czarnowski.
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How Do I Increase My Social Security Benefits After Retirement
To increase your monthly benefit, don’t start taking Social Security payments right when you reach full retirement age. The longer you wait, the more you’ll get each month. If you want to get the highest possible amount of Social Security benefits each month, you need to wait until age 70 to retire.
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How Should I Decide When To Take Benefits
Consider the following factors as you decide when to take Social Security.
Your cash needs: If you’re contemplating early retirement and you have sufficient resources , you can be flexible about when to take Social Security benefits.
If you’ll need your Social Security benefits to make ends meet, you may have fewer options. If possible, you may want to consider postponing retirement or work part-time until you reach your full retirement ageor even longer so that you can maximize your benefits.
Your life expectancy and break-even age: Taking Social Security early reduces your benefits, but you’ll also receive monthly checks for a longer period of time. On the other hand, taking Social Security later results in fewer checks during your lifetime, but the credit for waiting means each check will be larger.
At what age will you break even and begin to come out ahead if you delay Social Security? The break-even age depends on the amount of your benefits and the assumptions you use to account for taxes and the opportunity cost of waiting . The SSA has several handy calculators you can use to estimate your own benefits.
If you think you’ll beat the average life expectancy, then waiting for a larger monthly check might be a good deal. On the other hand, if you’re in poor health or have reason to believe you won’t beat the average life expectancy, you might decide to take what you can while you can.
Benefit Based On Pia And Age
The amount of retirement benefits paid depends on a person’s age when he or she begins receiving benefits. We reduce benefits taken before a person’s normal retirement age and we increase benefits taken after normal retirement age.
We assume the worker in case A begins receiving benefits at the earliest possible age, which is age 62. Because case A’s normal retirement age is 67 years, the benefit amount for case A is reduced for 60 months of early retirement. The $2,079.60 PIA is thus reduced to a monthly benefit of $1,455.00.
The benefit amount for case B, assuming that benefits begin exactly at normal retirement age of 66 years and 4 months, is not reduced except for rounding down to the next lower dollar. The $3,313.80 PIA is thus reduced to a monthly benefit of $3,313.00.
In addition to case B, we also have other benefit examples forworkers whose earnings have equalled or exceeded maximum taxable amounts. These examples show AIME and benefit amounts for retirement at ages 62, 65, 66, 67, and 70.
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Several Factors Contribute To The Benefits Formula
The SSA uses your highest earning, inflation-adjusted 35 years, so working 35 years or longer is best. For each year under 35, the SSA uses $0 for your income that year. It doesnt take a rocket scientist to understand that this will result in lower payments.If you earned high wages, you are better off however, in the low-earning years SSA will add a cost-of-living adjustment to your annual income.If you retire at full retirement age, which depends on your birth year, you will receive more.If you choose a claiming age of 62 , you may receive up to 76% less than if you wait till the highest age to retire.
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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How To Decide When To Claim Social Security
Think less about when you should claim Social Security and more about what you can do. Once understand what can do, in a position to decide what you should do, said Czarnowski.
One thing thats critical to learn is your full retirement age or FRA. Thats the age at which you’re entitled to your full retirement benefit amount. And your year of birth determines your FRA.
You can find your FRA by birth year on the Social Security website. But you dont have to claim at FRA. In fact, you can start collecting benefits as early as age 62 or as late as age 70. If, however, you start receiving benefits early, your benefits are reduced permanently a small percent for each month before your FRA. And if you delay your benefits until after FRA, you will be eligible for delayed retirement credits that would increase your monthly benefit.
But no matter when you claim, make it an informed decision, Czarnowski said.
How To Calculate Your Pia Using The Wage
The wage indexing method can be used to calculate retirement, survivors, and disability benefits. However, the method used to calculate disability benefits is slightly different. The following discussion applies only to calculating your PIA for retirement and death benefits.
Follow these steps to calculate your PIA:
- Count the number of years elapsed between 1951 and the year you turned 61. If you were born in 1929 or later, this number will be 40.
Example: Peter retired from his job in 1992. He was 62. He turned 22 in 1952, so count the number of years between 1952 and 1991 . Forty years have elapsed.
- Use the number of elapsed years to determine the number of benefit computation years. To do this, subtract five from the number of computation elapsed years. This figure will be used to calculate your average indexed monthly earnings . If you were born in 1929 or later, this number will be 35.
Example: Peters computation elapsed year figure is 40. 40-5=35. So, Peters benefit computation year figure is 35.
Example: Peter started working in 1951 and retired in 1992. For each year starting with 1951 and ending with 1989 , calculate his indexed earnings. His indexing year is 1990 . For example, Peters earnings in 1965 were $2,000. In 1965, the indexing average wage was $4,658.72. In 1990, the indexing average wage was $21,027.98. Calculate his 1965 indexed earnings:
$2,000 multiplied by $21,027.98 divided by $ 4,658.72 = $9,027.36
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