How Your Social Security Benefits Are Calculated
Your Social Security benefits are based on the 35 calendar years in which your income was the highest. If you have fewer than 35 years of earnings, each year with no earnings will be entered as zero. You can increase your Social Security benefit at any time by replacing a zero or low-income year with a higher-income year.
There is a maximum Social Security benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2021, the maximum monthly benefit is $3,113. For someone filing at age 70, the maximum monthly amount is $3,895.
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
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.
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.
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There Are Social Security Survivor Benefits For Spouses And Children
If your spouse dies before you, you can take a Social Security survivor benefit. However, that won’t be in addition to your own benefit. You must choose one or the other. If you are at full retirement age, that benefit is worth 100% of what your spouse was receiving at the time of his or her death .
A widow or widower can start taking a survivor benefit at age 60. However, the payment will be reduced because it’s taken before full retirement age. If you remarry before age 60, you are not eligible for a survivor benefit. If you remarry after age 60, you may be eligible for a survivor benefit based on your former spouse’s earnings.
Eligible children who are under age 18 or were disabled before age 22 can also receive a Social Security survivor benefit. It would be worth up to 75% of the deceased’s benefit.
Social Security And Working: You Will Always Pay Social Security Taxes
No matter your full retirement age and whether or not you are paying work penalties or not, if you are working, you will continue to pay Social Security taxes on your earnings.
The good news here is that your additional earnings could potentially increase your Social Security benefit amount. Social Security will check your record every year and will notify you if you have achieved a higher benefit amount.
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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.
How To Stop Social Security Check Payments
The SSA can not pay benefits for the month of a recipients death. That means if the person died in July, the check received in August must be returned. Find out how to return a check to the SSA.
If the payment is by direct deposit, notify the financial institution as soon as possible so it can return any payments received after death. For more about the requirement to return benefits for the month of a beneficiarys death, see the top of page 11 of this SSA publication.
Family members may be eligible for Social Security survivors benefits when a person getting benefits dies. Visit the SSA’s Survivors Benefits page to learn more.
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Social Security Death Index
Social Security collects death information to administer their programs this death information is compiled into the Death Master File , Social Securitys electronic database. The DMF was created in 1980 and contains records of people with Social Security numbers that have been reported dead from 1962 onward. Two versions of the DMF are prepared. The first is the full file, containing all death records, including those received from the States. This file is shared only with certain Federal and State agencies. The second is the public file, known as the Social Security Death Index.
The Social Security Death Index contains death records extracted from the Social Security database, excluding data received from the States. The records in the index each have a set of information that includes a full name, birth year and date, death year and date, and Social Security number and place of issue.
The Social Security Death Index is a helpful tool in preventing identity fraud, verifying death, and doing genealogy work. It is used by leading government agencies, medical researchers, genealogists, biographers, and investigative firms. You can access some of these records through online sites such as FamilySearch.
The Big Question: When Should I Apply For Retirement Benefits
The single biggest decision youll make when it comes to Social Security retirement benefits is when to apply.
Every persons situation is unique and so theres no single right answer. In general terms and based on life expectancies, Social Security retirement benefits are calculated to give you approximately the same total amount of benefits over your lifetime. If you decide to draw benefits earlier in your life, your average monthly amount will be less than if you delay and draw benefits later in life.
The amount you receive can vary widely. For example, if you were born in 1953 or 1954 and you were entitled to draw a $1,000 benefit at your full retirement age of 66, that amount would be $750 if you decided to draw benefits starting at age 62. But in that same scenario, if you delayed benefits until age 70, the amount would jump to $1,350.
There is no exact science when deciding when to apply, but here are some things to consider as you decide whats best for you.
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If You’re Not Sure Why You Received A Payment
If you receive a check or direct deposit payment from the Treasury Department and do not know what its for, contact the regional financial center that issued it.
If you received a check, look for the RFCs city and state at the top center. Then contact that RFC to find out which federal agency authorized the payment. It will be one of these:
If you received payment byelectronic funds transfer , or direct deposit, follow the directions under Find Information About a Payment.
Use the Treasury Check Verification System to verify that the check is legitimate and issued by the government.
Who Qualifies For Social Security At What Age Do You Qualify For Social Security Benefits
Nearly one in five Americans receives some form of benefit from Social Security. Almost 80 years after its initiation, Social Security remains a vital lifeline for large numbers of Americans. Consider
- Nearly 40 million people receive retirement benefits with an average monthly benefit of $1,335.
- Another 9.5 million people receive disability benefits with an average monthly benefit of $1,165.
- Nearly 90 percent of people age 65 and older receive Social Security benefits, representing nearly 40 percent of their income.
- One in five married couples and about half of unmarried elderly Social Security beneficiaries rely on Social Security for at least 90 percent of their income.
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How Your Primary Insurance Amount Is Calculated
Once you have your AIME, you can calculate your primary insurance amount , the base rate for your Social Security payments. The PIA calculation relies on so-called bend points that determine how much of your income will be replaced by Social Security benefits in retirement.
Think of bend points as similar to tax brackets, in that they determine a percentage of your benefits based on incremental buckets of earnings. There are three bend point buckets: one for 90% of income replacement, one for 32% and one for 15%.
These bend point buckets help give lower lifetime earners a higher percentage of income replacement, and higher lifetime earners a lower rate of income replacement, says Jim Blankenship, certified financial planner and author of A Social Security Owners Manual.
The dollar amounts of bend points are adjusted for inflation each year, but the percentages of each bend point are set by law and remain unchanged. AIME amounts are always rounded down to the nearest $0.10. For 2021, the bend points are:
90% of the first $996 of your AIME, plus
32% of your AIME between $996 and $6,002, plus
15% of your AIME over $6,002
For a worker with an AIME of $6,250, the calculation would look like this:
90% of $966 = $896.40, plus
32% of $5,006 = $1,601.92, rounded down to $1,601.90, plus
15% of $248 = $37.20
This worker would earn a monthly Social Security benefit of $2,535.50 .
How Is Social Security Funded
Its called a contribution, like something youd voluntarily give to charity, but with FICA, you have no choice in the matter. By law, employers must deduct FICA taxes from their weekly payroll.
In 2020, federal payroll taxes generated $1.24 trillion or 5.9% of the gross domestic product . That $1.24 trillion accounted for 35.9% of all the federal revenues.
More than 85% of Social Security funding comes from payroll taxes. The other sources of funding are interest earned on the assets in the Social Security trust fund taxes on Social Security benefit and reimbursements from the General Fund, which amount to zero.
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How Much Social Security Will You Receive
It depends on how much you paid in FICA taxes, your birth year and when you decide to begin receiving benefits.
The maximum payout in 2021 for someone who files at age 70 is $3,895 per month, or $46,740 a year. The size of your check will depend on how much FICA tax youve paid, your birth year and when you decide to retire.
To qualify for any pay, you must have at least 40 credits. Americans receive one credit for each $1,470 they earn in 2021, and they get up to four credits per year.
That doesnt mean that if you earn four credits for 10 years you can saddle up and head into the retirement sunset. The earliest you can do that is age 62. Though the longer you wait, the more money youll receive.
In the U.S., full retirement age is 66 years and two months for those born in 1955, and it gradually increases to 67 for those born in 1960 and after. Full retirement age varies among countries, typically ranging between 65 and 67 years old.
If you want to retire at 62, you will receive just 70% of your full retirement benefits. The penalty decreases every year until you reach full retirement age .
If you wait until after you reach full retirement age to start receiving benefits, the funds will increase. If you wait to retire until age 67, you will get 108% of the monthly benefits because you delayed getting benefits for 12 months. If you can work longer and retire at age 70, youll get 132% of the monthly benefits for 48 months.
Where Does Money Collected For Social Security Go
The quick answer is into the governments massive retirement fund for American workers. How massive is it?
Since its inception, FICA has collected more than $20 trillion for Social Security and Medicare.
Congress enacted FICA in 1935. There were various state and local retirement funds at the time, but lawmakers decided workers needed a national safety net to keep them from spending their retirement and stuck eating cold beans every night for dinner.
That fund would also cover people who were disabled before reaching retirement.
The Social Security Board of Trustees 2020 annual report said that $1.062 billion was collected. The Social Security Administration paid $1.059 billion in benefits. The costs are projected to exceed the income by 2021 and in the years to come, sounding the alarms for future generations.
That $3 billion surplus was put into trust funds to cover future payments. The Trustees reported the total asset reserves in the trust funds were $2.85 trillion, which seems like a lot of money, and it is, but with people living longer, more benefits are going out and there are questions about whether there will be enough for your descendants.
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Theres An Annual Social Security Cost
One of the best features of Social Security benefits is that the government adjusts the benefits each year based on inflation. This is called a cost-of-living adjustment, or COLA, and helps your payments keep up with increasing living expenses. The Social Security COLA is quite valuable its the equivalent of buying inflation protection on a private annuity, which can get expensive.
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 saw a 1.3% COLA in their monthly Social Security benefits.
The Kiplinger Letter predicted in September that the COLA for 2022 could be 6%, which would be the largest adjustment since 1982. The final COLA for 2022 will be announced on Oct. 13.
Heres what COLAs have been in other recent years:
- 2009: 5.8%
- 2021: 1.3%
What To Know About Working While Receiving Retirement Benefits
Andy Smith is a Certified Financial Planner , licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career.
The Balance / Marina Li
If you take Social Security benefits before you reach your full retirement age, and you earn an annual income in excess of the annual earnings limit for that year, your monthly Social Security benefit will be reduced for the remainder of the year in which you exceed the limit. If you will reach full retirement age during that same year, it will be reduced every month until you reach full retirement age.
The income withheld will be paid out once you reach full retirement age. In other words, your benefits aren’t lost they’re delayed.
Investment income does not count toward the annual earnings limit the only income that counts is earned incomethe income you earn by working either for someone or as a self-employed person.
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Increase Your Social Security Benefits
If you’re starting to realize that the $3,895 is probably out of your grasp, know that there are still ways to increase the Social Security benefits you’ll get. For example, make sure you work at least 35 years, as the benefits are calculated based on the 35 years in which you earned the most . So if you’re planning to retire after working just 30 years, know that the formula will be incorporating five zeroes for five years. Working a few more years can boost your benefit — especially if you’re earning more now than ever.
Beefing up your income for a few years can also work, and you might accomplish that by taking on a side gig, such as walking dogs, teaching music or a language, making and selling things online, or doing freelance writing, editing, photography, or web design, among many other options.
So don’t fret if you’re not going to get the maximum payout . Instead, do what you can to simply maximize the payout that you do ultimately receive. Spending a little time reading up on Social Security can pay off if it helps you get more out of the vital program.
The $16,728 Social Security bonus most retirees completely overlook
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How To Correct An Error On Your Social Security Statement
If you have evidence of your covered earnings in the year or years for which you think Social Security has made an error, call Social Security’s helpline at 800-772-1213, Monday through Friday, from 7 a.m. to 7 p.m. This is the line that takes all kinds of Social Security questions, and it is often swamped, so be patient. It is best to call early in the morning or late in the afternoon, late in the week, or late in the month. Have all your documents handy when you speak with a representative.
If you would rather speak with someone in person, call your local Social Security office and make an appointment to see someone there, or drop into the office during regular business hours. If you drop in, be prepared to wait, perhaps as long as an hour or two, before you get to see a representative. Bring with you two copies of your benefits statement and the evidence that supports your claim of higher income. That way, you can leave one copy with the Social Security worker. Write down the name of the person with whom you speak so that you can reach the same person when you follow up.
The process to correct errors is slow. It may take several months to have the changes made in your record. After Social Security confirms that it has corrected your record, request another benefits statement to make sure the correct information made it to your file.
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