How Is Your Retirement Benefits Calculated
The Social Security Administration calculates how much you will receive looking at various factors. But the two main inputs that will determine your future benefits are your average income over your career and your age when you retire.
In order to be eligible to receive retirement benefits you must earn up to 40 credits, the maximum number that you can receive each year is 4, so you will need to work at least 10 years. However, some people take longer to earn those credits and that doesnt take into account the second factor.
The Social Security Administration will also calculate the average of the 35 highest-earning years of your career. If you work for less than 35 years the number put into the equation for years without earnings would be zero, thus bringing down your average. Note that you dont get more than 40 credits even if you earn them in 10 years and keep on working.
Great news for Social Security beneficiaries! Social security benefits will increase 5.9 percent in January due to a cost-of-living adjustment. For more information about the increase, visit .
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How Much You’ll Get In Retirement From Social Security
To simplify the calculations, let’s look at workers who have seen their pay rise at exactly the rate of inflation over the course of a 35-year career, ending with $40,000 in 2017. Average indexed monthly earnings under this assumption would therefore be $3,333, and if you use the benefit calculation formula from the SSA for those first eligible to take Social Security in 2017, you’ll get the following numbers:
- You get 90% of the first $885 in average indexed monthly earnings. That works out to $796.50.
- Then, you get 32% of the amount up to $5,336 per month. In this example, that takes care of the remaining $2,448, and 32% of that amount is $783.36.
- Add those two figures together, and you’ll get $1,579.86 per month.
Early retirees won’t get that amount, because the calculation produces what you’d get if you wait until full retirement age to claim. For those turning 62 in 2017, full retirement age is 66 and two months. If you instead claim at 62, then you’ll face reduction of more than 25%. The exact calculation produces a figure of about $1,172 per month.
If you wait beyond full retirement age, you can get delayed retirement credits of 8% per year until age 70. That can give you more than 30% extra in monthly benefits beyond the $1,579.86 figure above. The numbers won’t all be the same, because the benefit formula is different depending on your current age, and future benefits are indexed for inflation.
What Social Security Will Take From You During Your Lifetime
Those who make $40,000 pay taxes on all of their income into the Social Security system. It takes more than three times that amount to max out your Social Security payroll taxes. The current tax rate is 6.2%, so you can expect to see $2,480 go directly from your paycheck toward Social Security. Your employer will pay another $2,480 on your behalf.
All of your $40,000 salary goes into the calculations for determining how much your monthly Social Security checks will be after you retire. $40,000 is also enough to give you the maximum of four Social Security work credits for the year, getting you closer to the 40 credits you need throughout your career to qualify for retirement benefits. You might also need those credits if you have to claim Social Security disability benefits.
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How Can I Switch From My Social Security Benefit To A Spousal Benefit
Say you start collecting Social Security benefits at age 62 based on your own work history. Your spouse keeps working and delays filing until age 70. If your spousal entitlement is higher, you can switch to that. The spouse will get the maximum amount while youll get 50% of the amount the spouse would have received at full retirement age.
To monitor your benefits or change them, you can create an account on the Social Security site. It contains a wealth of information and it allows you to make some changes online, although others require a phone call.
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When Is It Worthwhile To Continue Working While On Social Security For Higher Benefits
In the end, whether or how beneficial it is to continue to work while on Social Security in order to generate higher Social Security benefits in the future depends heavily on two factors: what income replacement tier the Social Security recipient will be in and what the existing earnings history already was . Similar to the consequences of retiring early , the consequences vary depending on where the individual is in the AIME calculation.
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What Is The Maximum Spousal Social Security Benefit
The maximum spousal benefit is 50% of the amount that the spouse is eligible to receive at full retirement age. Thats a cap, by the way. If your spouse delays retiring until 70, the spouse gets more but you dont.
Survivors may receive up to 100% of the deceased persons Social Security amount. Theres a complicated formula for families in which more than one dependant is eligible for benefits. It caps the maximum.
You’re Worried You Won’t Get Medicare Coverage
It could be the case that you want to start getting Medicare benefits at 65 and aren’t ready for Social Security — but you sign up for Social Security at that age anyway because you’re convinced your Medicare coverage hinges on it. In reality, though, you can be on Medicare for years before claiming Social Security, and it won’t impact the level of care you receive.
The only drawback to signing up for Medicare before Social Security is that you won’t have the option to pay your Part B premiums directly from your Social Security benefits. Not only does that mean you’ll need to take that step yourself, but it also means you don’t get protection under Medicare’s hold harmless provision. This provision effectively caps the extent to which your Medicare premiums can rise from year to year when you’re on Social Security, because an increase in Part B can’t cause your monthly benefit to go down.
In other words, if your annual cost-of-living adjustment raises your monthly Social Security benefit by $12, but Medicare premium costs rise by $13, you’re only liable for the extra $12. Still, the reduction in benefits you’ll face by claiming Social Security early will generally well outpace any increase Part B throws at enrollees, so if you’re ready to sign up for Medicare at 65 but don’t need your Social Security benefits just yet, don’t feel compelled to claim them.
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When Is The Best Age For Americans To Claim Social Security
When to claim Social Security retirement benefits is one of the most crucial financial decisions facing older workers. But not everyone makes informed choices. The timing of the claim is key. The earlier a worker files to receive Social Security, the lower the monthly payment for the rest of that workers life. The longer a worker waits, the larger the benefit. Workers can claim as early as 62, but face a permanent reduction of benefits for every year they file before full retirement age of 66 . Even so, nearly half of American workers claim Social Security benefits at 62, and a cumulative 60% claim before full retirement age electing to accept a significant loss of income for the remainder of their lives.
Plain old human psychology can also play a role. Behavioral scientists refer to this as an intertemporal choice problem between receiving a smaller reward now or a larger one later. Eat that ice cream sundae or demur and avoid diabetes? Sell now or wait for the house to appreciate? Cash-in a 401K early or allow it to continue growing? In making these decisions, the allure of immediate gratification can be stronger than future gain. Researchers at Columbia University found that people faced with intertemporal choices often emphasize receiving the reward right away. Apparently, deciding whether to claim Social Security benefits sooner than later is no exception.
Who’s The Higher Earner
Compare the estimates for you and your spouse, and pay special attention to the difference between your estimates. The higher earner is the spouse with the larger primary insurance amounts .
When you’re deciding who will collect first and who should wait, consider having the lower earner collect first and having the higher earner wait. Over time, the higher earner’s increases will be worth more than the lower earner’s increases.
And if one spouse’s estimates are more than twice as high as the other’s, it might make sense for both of you eventually to collect on the same spouse’s earnings record.
In that situation, the spouse with the lower benefits can claim first based on his or her own earnings record and apply for spousal benefits later when the spouse with the higher benefits starts to collect.
The longer the spouse with the higher benefit waits to start collecting, the higher benefits will be for both spouses. Delaying the higher earning spouse’s benefits could also eventually increase the other spouse’s survivors benefits.
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Claiming Social Security At Age 66
If you were born between 1943 and 1954, your Full Retirement Age is 66. Claiming at your Full Retirement Age will entitle you to your full benefit amount, but you can still wait to claim. If you wait further, you will garner delayed retirement benefits, which will increase your monthly benefit when you do start collecting.
At Full Retirement Age you can work without any deductions from your benefit amount. However, you may still be taxed on your benefit if you have other substantial income such as wages, self-employment, interest, or dividends. If so, the Internal Revenue Service taxes your combined income which is your adjusted gross income, plus nontaxable interest, plus half of your Social Security benefits.
If you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you will have to pay income tax on up to half your benefits. If your income is more than $34,000, up to 85 percent of your benefits might be taxable.
If you are married and file a joint return, and your income together is between $32,000 and $44,000, you may have to pay income tax on up to half your benefits. If your income exceeds $44,000 you may have to pay income tax on up to 85 percent of your benefits.
How To Calculate Social Security Benefits In Excel
If you are in your late 50s and approaching retirement, you can create a useful model of your future benefits. It works best to do this in a Microsoft Excel spreadsheet, as follows:
- Using a recent Social Security statement, list in spreadsheet column A your taxable Social Security earnings year by year.
- List in column B the most recently published NAWI adjustment factors as published by the SSA.
- Multiply columns A and B and output the result to column C.
- Identify in column D the 35 highest values in column C. Add these together and divide the sum by 420 . This will approximate your AIME.
- Use the most recently published bend points to convert your AIME into a PIA.
You also can fill in hypothetical values for estimated taxable Social Security earnings in future years until you plan to stop working. To be conservative, use a NAWI adjustment factor of 1.0 in column B for all future years.
A financial advisor who fully understands this process can be helpful in verifying your calculations, advising you on when to start Social Security benefits, and estimating the future benefits you can expect to receive.
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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.
Can You Collect Social Security And A Pension At The Same Time
Can you collect Social Security and a pension? En español | Yes. There is nothing that precludes you from getting both a pension and Social Security benefits. If your pension is from what Social Security calls covered employment, in which you paid Social Security payroll taxes, it has no effect on your benefits.
Why File For Social Security At 64
If you could claim Social Security at the earliest possible age of 62 without incurring a financial penalty, perhaps more people would rush to do so. But what motivates many seniors to hold off is that taking benefits before full retirement age results in an automatic reduction.
Your full retirement age is based on the year you were born, as follows:
Year of Birth
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
When you file for benefits prior to FRA, you’re subject to a 6.67% reduction for the first three years you file early, and a 5% reduction each year thereafter. That means that if your FRA is 66 and you take Social Security at 62, you’ll lose 25% of your benefits.
But while 25% is a pretty hefty reduction, 13.34% isn’t quite as bad. And if you have a good reason to get at those benefits at age 64, that’s the only reduction you’ll face.
So what constitutes a valid reason to file for benefits early? One scenario is if you’ve lost your job and need the income to stay afloat. Slashing your benefits may not be ideal, but it’s better than racking up costly credit card debt — debt that you could end up carrying to the grave.
You Don’t Know Your Full Retirement Age
You might assume that 65 is your full retirement age for Social Security purposes because that’s when you’re first eligible for healthcare coverage under Medicare. But for people born between 1943 and 1954, full retirement age is 66. For those born between 1955 and 1959, it’s 66 and a certain number of months. And for those born in 1960 or later, it’s 67.
If you sign up for Social Security at 65, you’ll automatically slash your monthly benefits between 6.67% and 13.34%, depending on your full retirement age, so rather than grapple with a lifelong reduction in Social Security income, commit your full retirement age to memory. Incidentally, in a recent Nationwide survey, only 24% of older adults knew what their full retirement age was, so if you’re nearing retirement, be sure to get that number straight.
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What If I Continue Working In My 60s
Many people whose health allows them to continue working in their 60s and beyond find that staying in the workforce keeps them young and gives them a sense of purpose. If this sounds like something youâd like to do, know that working after claiming early benefits may affect the amount you receive from Social Security. Why? Because the Social Security Administration wants to spread out your earnings so you donât outlive them. If you claim Social Security benefits early and then continue working, youâll be subject to whatâs called the Retirement Earnings Test.
If youâre between age 62 and your full retirement age, and youâre claiming benefits, you need to know about the Earnings Test Exempt Amount, a threshold that changes yearly. For 2021, the Retirement Earnings Test Exempt Amount is $18,960/year . If youâre in this age group and claiming benefits, then every $2 you make above the Exempt Amount will reduce by $1 the Social Security benefits youll receive.
Contrary to popular belief, this money doesnât disappear. It gets credited back to you with interest in the form of higher future benefits. You may hear people grumbling about the Social Security âEarnings Taxâ, but itâs not really a tax. Itâs a deferment of your benefits designed to keep you from spending too much too soon. And after you hit your full retirement age, you can work to your heartâs content without any reduction in your benefits.
The Maximum Being Paid Out At 62 65 And 70
If youre at the maximum taxable earnings limit and you retire in 2018, then the most you can receive in monthly benefits at age 62, 65, and 70 is $2,158, $2,589, and $3,698, respectively.
|Maximum Social Security if You Retire in 2018|
Data source: Social Security. Chart by author.
Clearly, waiting to claim Social Security until youre older pays off. Thats because Social Security will reduce your payment by a fixed percentage for every month you claim prior to reaching your full retirement age, or the age at which you qualify for 100% of your benefit. Full retirement age varies depending on your birthday, but in 2018, its 66 years and four months.
If you delay claiming Social Security until after your full retirement age, then your benefit is increased by two-thirds of 1% for every month you wait, up to age 70. If you have fewer than 35 years of work history, waiting also benefits you by increasing your monthly full retirement age benefit amount. Since Social Security uses zeros in its calculation when there are fewer than 35 years, any additional years you work will replace those zeros and increase your benefit.
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