Wednesday, August 17, 2022

How Does Social Security Figure Your Benefits

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How To Apply For Social Security Retirement Benefits

How to Calculate Your Social Security Benefits

The easiest and quickest way to apply for retirement benefits or spousal benefits with the Social Security Administration is online. However, you can also call them, at 1-800-772-1213 or visit a local Social Security office. The documents and information youll need to provide include:

Other documents, such as a birth certificate or W-2, might be necessary. If you apply online, youll receive a letter in the mail with the Social Security Administrations decision.

Myth #: You’ll Never Get Back All The Money You Put Into The Program

Everyone’s situation is different, but if you live a long time, you may collect more than you contributed to the system.

Due to the complexity of claiming strategies and number of variables involved, the SSA no longer offers a break-even calculator on its website. Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors of deceased insured workers. The contributions you and your employers make during your working years provide:

  • Current retirees and other Social Security recipients with payments
  • A guaranteed lifetime income benefit when you reach retirement
  • While the government does not have a specific account set aside just for you with your FICA contributions , one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk you’ll outlive your savings. Even if you live to 100 or more, you’ll continue to receive income every month. And, if you predecease your spouse, your spouse also receives survivor benefits until their death.

    Your Social Security Benefit Isnt Always Based On 35 Years Of Work History

    Have you ever wondered how the Social Security Administration calculates your benefits? We have countless resources on this site that explain the various formulas, rules, and exceptions if youre curious.

    But we havent discussed one big exception to the main calculation for arriving at your Social Security income amount, and that is the fact that the Administration doesnt always use all of your years of historical earnings to figure your benefit.

    Instead, they only use the years designated as computation years, This refers to the number of earnings years used to calculate your Social Security benefit and its why even if youve worked for at least 35 years, not all of those years may be included in the average.

    Using 35 Years of Work History Is a General Rule But Its Not Always Used to Figure Your Social Security Benefits

    How many computation years the Administration uses can be a point of confusion. Some have mistakenly thought its the three highest-earning years of your working career, or the highest five years.

    This isnt true when it comes to Social Security, although its a common measure for many pension calculations.

    Another common perception is that the Social Security Administration will take 35 of your highest-earning years and get an average earnings level from those numbers. And while that is the general rule, its not always 35 years thats used in the calculation.

    How Social Security Retirement Benefits Are Calculated


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    Costs Of Living Adjustment

    The COLA is an annual adjustment to your Social Security benefits based on inflation. It changes each year based on the Consumer Price Index for Urban Workers and Clerical Workers . For workers who do not retire at their earliest retirement age, it is applied cumulatively to the PIA.

    For example, the COLA in 2018 was set at 2%. If the worker from our example above chooses not to retire at 62, his PIA will still be adjusted upward to a resulting PIA of 2,339.40.

    Claiming Social Security Benefits At The Right Time Means More Money In Your Pocket Here’s A Guide To Everything From Knowing Your Full Retirement Age To Taking Social Security Spousal Benefits

    Squad Timing

    For many Americans, Social Security benefits are the bedrock of retirement income so maximizing this stream of income is critical.

    The rules for claiming Social Security benefits can be complex, but this guide will help you successfully navigate the details. Educating yourself can ensure that you claim the maximum amount to which you are entitled.

    Here are 12 essential details you need to know.

    Also Check: How Many Years Do I Need To Work To Get Social Security

    Myth #: You Must Claim Your Social Security Benefit At Age 62

    Some people think you have to start claiming your Social Security benefits at age 62. That’s a myth: 62 is the earliest age you can claim your benefit, but it’s not the only age to do so.

    Your base benefit is calculated according to your “full retirement age,” or FRA, and your FRA is determined by your date of birth. The Social Security Administration calculates your base Social Security benefit based on your average indexed monthly earnings during the 35 years in which you earned the most .

    Tip: You’ll find your FRA at Social Security’s website,, or on a paper statement mailed to you by the SSA. If you were born between 1955 and 1959, your FRA is 66 plus some months. If you were born in 1960 or later, your FRA is 67.

    If you claim Social Security benefits any time before your FRA, you lock in a permanent reduction in monthly income. Claiming at 62 translates to a reduced monthly income of 25% to 30%, relative to your FRA monthly benefit. That means you may receive a lot less monthly retirement income, every year, for potentially several decades. A key consideration for when you claim Social Security benefits is maximizing your income for a retirement that could last longer than 30 years.

    Wait until age 70 and lock in a “bonus”:

    Read Viewpoints on Longevity and retirement

    Should You Trust Your Social Security Benefits Estimate

    If youre building a retirement income plan , Social Security will likely play a role. As such, you need to know whatto expect in Social Security benefits when constructing your plan to ensure itworks.

    Unfortunately, your Social Security benefits estimate from the statements you can pull from the Social Security Administration is not the best source of information on what to expect in the future.

    The issue lies with the omissions that the Administrationmakes with their estimate methodology. To understand why this is a problem, weneed to start with a basic overview of the calculation used to create yourSocial Security benefit estimate.

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    Your May Have To Pay Taxes On Social Security Benefits

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

    It doesn’t take a lot of income for your Social Security benefits to be taxed. 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 12 States That Tax Social Security Benefits.

    Beginning Benefits Before Fra

    How To Calculate Taxes on Your Social Security Benefits

    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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    Average The Highest 35 Years

    The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.

    Total the highest 35 years of indexed earnings, and divide this total by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.

    For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total $1,919,040. Divide by 420 to get an AIME of $4,569.

    How to Calculate Your AIME for Social Security Benefits

    Why Was The Cola So High For 2022

    The covid-19 pandemic has caused many economic problems. One of the most pervasive is supply chain issues that are leading to a surge in prices. Inflation is up more than six percent over the last year, and for that reason, the COLA is the highest in decades.

    Consumer prices increase 6.2 percent for the year ended October 2021 #BLSdata

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    What To Do If You Earn More Than The Social Security Earnings Limit

    Let me say that the Social Security Administration will only contact you by official mail through the United States Postal Service. Unless you initiate phone communication, they will never call you. Having said that, please understand that all of the examples I share come from communications by mail.

    You dont have to do anything in advance if you work while collecting benefits and expect to exceed the annual earnings limit.

    Yes, the Social Security Administration wants you to advise them in advance. However, that isnt always practical for various reasons. You will not be penalized or pay extra for waiting until you are certain how your particular circumstances develop.

    When Social Security receives your W2s and tax returns, they will evaluate your account and make adjustments accordingly.

    Other Key Questions About Full Retirement Age

    Free Social Security Calculator Tool: Estimate Your ...

    Streeter: First, I would suggest the person and their family have a thorough review of all their assets and debt, including home equity, mortgages, student loans , retirement plan balances, and other checking and savings accounts. Second, its important to understand the implications of retirement age on the Social Security benefits. For some people who are in good health and can afford to delay Social Security, it might be better for them to delay in order to receive higher benefits for the rest of their lives. Third, the person or family need to have an honest conversation about their envisioned retirement style. E. g. , will they travel much? Will they dine out or cook at home? Lastly, the longevity risk. Whether they will outlive their wealth. People need to put all these points together in order to see whether they are on track of a retirement life that they had planned for.

    Video advice: Why its important to have 35 years of Social Security earnings

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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.

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    Do You Expect To Have Additional Sources Of Retirement Income Beyond Social Security

    Continue saving in the coming years.

    Social Security won’t replace all of your pre-retirement income. On average, Social Security replaces 40 percent of a worker’s income. That means your retirement savings, pension, 401, or Individual Retirement Account will need to fill the gap. Claiming at your full Social Security benefit age or later can minimize this gap and maximize your monthly benefit. If you claim before your full retirement age, your monthly benefit could be reduced by as much as 30 percent.Learn more about saving for retirement.

    You have an opportunity to continue growing your money.

    If you can, get the highest monthly Social Security benefit possible by claiming at your full Social Security benefit age or later. If you claim before your full retirement age, your monthly benefit could be permanently reduced by as much as 30 percent. Also, take advantage of catch-up contributions to your 401 or Individual Retirement Account . Lastly, avoid losing your retirement savings to unnecessary tax penalties. If you withdraw your 401 or IRA savings before age 59½, you will likely face an early withdrawal penalty.Learn more about how retirement savings grow.

    It’s a perfect time to start saving.

    It’s never too late to start saving!

    There are many ways to plan for a secure retirement outside of Social Security.

    It’s never too late to start saving!

    A type of retirement savings account offered by employers to help their employees save for retirement.

    You Can Undo A Social Security Benefits Claiming Decision

    How To Calculate Social Security Benefits [3 Easy Steps]

    There aren’t many times in life you can take a mulligan. But Social Security offers you the chance for a do-over. Let’s say you claimed your benefit, but regretted the decision and wished you had waited. Within the first 12 months of claiming Social Security benefits, you can withdraw the application. You will need to pay back all the benefits you received, including any spousal benefits based on your record. But you can later restart your Social Security benefits at the higher amount youll earn by waiting.

    Early claimers have another opportunity for a do-over: They can choose to suspend their Social Security benefit at full retirement age. Say you took your benefit at age 62. Once you turn full retirement age, you can suspend your benefit. You don’t have to pay back what you have received, and your benefit will earn delayed retirement credits of 8% a year. Wait to restart your benefit at age 70, and your monthly payment will get up to a 32% boost — which could erase much of the reduction from claiming early.

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    How Social Security Works

    The Social Security Administration uses a multi-step formula to calculate just how much any given American gets in benefits. Factors include marriage, lifetime contributions, work history and more. But the purpose is always the same: to make sure that everyone who works has a safety net for retirement. To understand just how important that is we have to recall how senior citizens lived before President Franklin Roosevelt’s administration invented this program.

    Although precise measurement hadn’t yet begun, most estimates suggest that in 1934 approximately half of all seniors lived in poverty. Most estimates suggest that this figure would have changed little over the past 84 years without the Social Security program. Instead, by 1959 this figure had fallen to 35%. By the year 2000 only 1-in-10 seniors lived in poverty, a number that has stayed largely consistent to this day. In many very real ways, Social Security created the concept of retirement.

    Of course, there’s still far to go. Nearly a third of seniors still live within 200% of the poverty line, and many more still struggle to pay their bills.

    Get Payments For An Ex

    If you aren’t married, but you were in the past for at least 10 years, you may still be able to file for spousal or survivor benefits. They would be based on your ex-spouse’s earnings. Too many divorced people are not aware of their payment options based on an ex-spouse’s earnings record. Look at all of your options so that you can claim in a way that makes the most of your income when you retire.

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    How To Calculate Social Security Benefits

    If youd just like a ballpark estimate of your benefit, the Social Security Administration offers a quick calculator to give you a sense of your potential benefit. This calculator simply asks for your current annual salary, your birth date and your projected retirement date, although it does allow you to fill in your actual income by year to get a more accurate estimate.

    This estimate does not take early or late application for benefits, taxes and Medicare, or COLA increases into account. Youll likely need to download the Social Security Administrations full calculator software or work with a financial advisor to determine your full benefits considering those factors.

    Knowing how much you can expect to receive in Social Security gives you an important piece of your retirement income puzzle. With that in hand, you can make the financial plans you need for a secure and fulfilling retirement.

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