Understanding How Your Benefit Amount Is Calculated
Your Social Security benefits will be based on your average lifetime earnings, expressed as your primary insurance amount . Calculating your PIA is complicated because some factors used in the benefit formula change annually. Instead of calculating it yourself, its easiest to obtain a benefit estimate directly from the SSA .
However, knowing how your PIA is calculated may be useful in benefit planning. Currently, the two PIA calculation methods most frequently used are:
Two other benefit computation methods are less frequently used:
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Maximum Social Security Benefits You Can Get
The maximum monthly Social Security benefit available to someone retiring in 2021 is $3,895, which assumes that:
- They worked 35 years or more
- In their 35 top-earning years, their income met or exceeded the SSA’s maximum taxable amount, so that they paid the largest Social Security tax amount possible for each of those years
- They are retiring at age 70, which entitles them to the maximum delayed retirement credit
For comparison, the table below lists the monthly benefits for workers who plan to retire in 2021 whose earnings met or exceeded the SSA maximum-taxable limit every year of their working lives, from age 22. This situation is far from typical, but it shows the impact of retirement age on Social Security benefits, isolated from other factors.
|Maximum Social Security Benefit for Workers Retiring in 2021|
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Is There A Maximum Benefit
Yes, there is a limit to how much you can receive in Social Security benefits. The maximum Social Security benefit changes each year. For 2021, itâs $3,895/month for those who retire at age 70 . Multiply that by 12 to get $46,740 in maximum annual benefits. If that’s less than your anticipated annual expenses, youâll need to have additional income from your own savings to supplement it.
Beginning Benefits Before Fra
If you choose to begin to receive benefits before you reach your full retirement age, one or both of the following calculations will apply:
- 5/9 of 1%: Your benefits are reduced by 5/9 of 1% per month, up to a maximum of 36 months, depending on how many months you have until you reach FRA.
- 5/12 of 1%: If you are more than 36 months away from reaching FRA, the reduction above is applied, and then for the number of months greater than 36, the benefit is further reduced 5/12 of 1% per month.
Therefore, if your FRA is age 66, your benefits would be reduced by 25% if you begin taking them at age 62. Find that figure by taking 5/9 of 1%, or 0.56 multiply by 36 months to get 20%. Then, 5/12, or 0.42, multiplied by the remaining 12 months, is 5% for a total of 25%.
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There Are A Few Tools You Can Use To Calculate Your Social Security Benefits Including Signing Up For A My Social Security Account
The best way to estimate your Social Security benefits is to sign up for a my Social Security account. The Social Security Administration used to mail benefit statements every five years to workers between the ages of 25 and 60 and then annually until they started taking benefits. But since 2011, the agency has cut back on mailing statements. It now only sends paper statements to workers who are at least 60 years old and have not yet signed up for a my Social Security account. The statements are sent about three months before your birthday.
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For those who have an account, you will receive an email about three months before your birthday reminding you to review your online statement.
The benefit estimate provided in the statement is based on your past earnings and a projection of your future income, which assumes your income will remain at the same level as the previous year until you retire. You could get more than the estimate if you end up earning more in the future or less if your income drops. The statement provides an estimate if you continue working until age 62, your full retirement age and age 70.
The statement also includes an estimate for survivor benefits for your family and what you would receive each month if you became disabled and started taking disability benefits.
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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What Will Your Social Security Benefits Be When You Retire And What About Your Spouse
Your Social Security benefits can be estimated based on your average annual income, your current age and your age when you retire. Use our calculator to estimate your Social Security benefits during retirement.
For a more accurate and detailed estimate, visit the Social Security Administration website at www.ssa.gov where benefits will be determined based upon your exact earnings history and the date of your retirement.
Explore How The Age You Start Collecting Social Security Affects Your Retirement Benefits
The calculator bases your benefit estimate on current formulas from the Social Security Administration. Your answers are anonymous. Because we do not access or use your Social Security earnings record, these are rough estimates.
Your estimated benefits:
Select claiming ages on the graph to see how your estimated benefit changes.
Claiming at age Age 67 is your full benefit claiming age.
Compared to claiming at your full benefit claiming age.
Social Security retirement benefits are not designed to be your sole source of retirement income, but waiting even one month will increase your benefits.
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Are Social Security Benefits Taxable
If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits wonât be taxed at all. The amount of your benefits that is subject to taxes is calculated on a sliding scale based on your income. Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.
If your retirement income is high enough that your benefits are taxable, how do you pay those benefits? You can ask Social Security for an IRS Voluntary Withholding Request Form if youâd like the government to withhold taxes from your Social Security benefits. Otherwise, youâre expected to file quarterly tax returns to pay these taxes over the course of the year.
That covers federal income taxes. What about state income taxes? That depends. In 13 states, your Social Security benefits will be taxed as income, either in whole or in part the remaining states do not tax Social Security income.
Social Security For The Disabled
People who are disabled, are dependents of retired or disabled workers, or are surviving spouses/children may also receive benefits. Note that this is supplementary information and that the Social Security Calculator only provides calculations for retirement benefits.
The SSA’s definition of disability refers to total disability, so partial or short-term disabilities are not qualified for benefits. Under the SSA’s rules, a person is disabled only if they meet all of the following conditions:
- They cannot do work they did before
- The SSA decides that they cannot adjust to other work because of their medical condition
- The disability has lasted or is expected to last at least one year or to result in death
Benefits usually continue until beneficiaries are able to work again. Disability beneficiaries that reach full retirement age will have their benefits converted into retirement benefits, with the amount remaining the same. It is against the law to receive both disability and retirement benefits at the same time.
Social Security Disability Insurance
Supplemental Security Income
In some situations, it is possible to receive both SSDI and SSI. This usually happens when a qualified application for SSDI is granted low enough an SSDI benefit to make the applicant also eligible for SSI.
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Retiring Early From Declining Income Below The Highest 35 Years
After all, the reality is that if the worker already has 35 years of work history, all of which are at least as high as current earnings , then the prospective retiree isnt actually earning any further increase in benefits by continuing to work! Because the AIME formula only counts the highest 35 years and drops the rest. So if the prospective retiree isnt adding new years that are higher than the existing ones, the additional years of work have no impact. Which means stopping work early has no adverse impact, either.
For instance, the chart below shows an individuals historical earnings over a career, including a substantial ramp-up in the early years, followed by a career transition , then a steady series of raises, with a few wind-down years of consulting work at the end. The top 35 years are shown in blue, and the low years are shown in orange.
As the chart above shows, additional years of work at the current consulting levels will have no impact on benefits because there are already 35 years of historical earnings at even higher levels. As a result, quitting work after age 64 wont have any impact on the benefits that were originally projected to begin at full retirement age of 66.
When Will You Collect
The SSA calculates your benefit amount at your full retirement age . This depends on the year you were born. FRA by birth year is:
- 19431954: age 66
- 1955: age 66 and two months
- 1956: age 66 and four months
- 1957: age 66 and six months
- 1958: age 66 and eight months
- 1959: age 66 and 10 months
- 1960 and later: age 67
The monthly amount you are eligible to receive at your FRA is considered your full benefit, but it is not your minimum or maximum benefit.
You have the option to file for early retirement as early as age 62. But, you may choose to delay taking your benefits until as late as age 70.
There are many reasons why you might choose to take early retirement or to delay it. That choice has a direct impact on the amount of your monthly payment. If you opt for early retirement, you are choosing a lower monthly payment for the rest of your life. By choosing to delay your benefit to any age between your FRA and age 70, you lock in an increase.
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How Your Benefit Amount Is Determined
Your average lifetime earnings, otherwise known as your Primary Insurance Amount , determine your Social Security benefits. As you can guess, calculating your PIA is complicated because some factors in the formula change annually. Its easiest to get that benefit estimate directly from the SSA, however, knowing how your PIA is calculated is useful in retirement planning. Currently, the two most frequently used PIA calculation methods are:
The simplified old-start benefit methodEvolved from the original 1939 Act formula, this method is used if, prior to 1979, you turned 62 years old, became disabled, or death occurred prior to 1979. It averages actual earnings and uses a table to calculate PIA.
The wage indexing methodIn use since 1979, this method indexes earnings to adjust them to reflect changes in wage levels throughout years of employment, ensuring that your benefits reflect increases in the standard of living. Through this method, your PIA is reached by indexing lifetime earnings up to and including the year you turn 59. Then, your PIA is calculated by averaging your highest earnings for a specific number of years and a benefit formula is applied.
How Does The Social Security Administration Calculate Benefits
Benefits also depend on how much money youâve earned in life. The Social Security Administration takes your highest-earning 35 years of covered wages and averages them, indexing for inflation. They give you a big fat âzeroâ for each year you donât have earnings, so people who worked for fewer than 35 years may see lower benefits.
The Social Security Administration also makes annual Cost of Living Adjustments, even as you collect benefits. That means the retirement income you collect from Social Security has built-in protection against inflation. For many people, Social Security is the only form of retirement income they have that is directly linked to inflation. Itâs a big perk that doesnât get a lot of attention.
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Adjust Your Pia For The Age You Will Begin Benefits
The final amount of Social Security retirement benefit that you receive is based on the age when you begin benefits.
Of course, another complex formula is used to determine how much more you will receive if you wait.
This formula uses your Primary Insurance Amount calculated in the previous step. This is the amount you will get if you start benefits at your full retirement age . Your FRA can vary, depending on the year you were born. For people born between 1943 and 1954, as in our example, the FRA is age 66.
For people born on Jan. 1, the FRA is based on the year prior. Someone born on Jan. 1, 1955, will have an FRA based on 1954.
A reduction is applied to your PIA if you begin benefits before your FRA. A credit, referred to as a “delayed retirement credit,” is applied if you begin to receive benefits after your FRA.
What Income Reduces Social Security Benefits
If you start taking Social Security benefits before you reach full retirement age, any income you earn over the annual limit until you reach full retirement age will lower your benefit eligibility for that year. In 2021, if you are retired and haven’t reached full retirement age, the SSA will deduct $1 from your benefits for every $2 earned over $18,960. In the year you reach full retirement age, the SSA will deduct $1 for every $3 earned over $50,520. For the 2022 tax year, these thresholds are slightly higher, at $19,560 and $51,960, respectively.
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Calculating The Income Replacement Rate For Social Security Benefits
Although not commonly understood, the calculation of Social Security benefits is really nothing more than an income replacement formula, similar to a pension. Just as a pension might offer an up-to-70% replacement rate based on the average of your last 5 years of wages, Social Security also provides benefits that are a replacement of your earnings based on your years of service. The primary difference is simply that Social Security uses a 35-year average of earnings that accrue based on your years of service , and the replacement rate itself is based on your income .
The individuals 35-year average of earnings is known as AIME Average Indexed Monthly Earnings and is calculated as a monthly average income over 35 years , and is inflation-adjusted . Notably, the lifetime earnings used to calculate the 35-year average of inflation-adjusted income is based on the highest 35 years of historical earnings, regardless of whether they were consecutive years or not.
Replacement rates are then calculated based on the highest-35-year AIME amount with the first $885/month replaced at 90%, the next $4,651/month replaced at 32%, and anything else replaced at 15%.
The final benefit is known as the Primary Insurance Amount , and becomes available to the retiree at Full Retirement Age .