Social Security Calculation Step : Adjust All Earnings For Inflation
So lets jump in with calculating your AIME. To do this, youll need to get use a notepad or a tool like Excel/Google Sheets.
Youre going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.
The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says view earnings record. If you dont have an online account, its very easy to set one up.
This may seem a little redundant to put the year and your age, but itll make another step a little easier.
Now you just need to copy down the information from the SS earnings history. Youll want to use the part that says your taxed Social Security earnings. Dont skip a year, even if there were no earnings. Just put a zero in.
Once you have all of your historical earnings recorded, its time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.
Important note hereonly your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.
How Much Will I Get In Social Security Benefits
If you are a typical U.S. worker nearing retirement, you have been shoveling money into the Social Security system through payroll or self-employment taxes for decades. Its possible that, over time, you and your employer together have contributed more than $200,000 into the system on your behalf. If you also figure in the time value of money on these contributions, your total contribution to the system could be twice as much. Now the time is approaching to turn the tables and determine what the Social Security Administration owes you.
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.
Also Check: How To Access My Social Security Account Online
If I Claim My Benefits When I Reach Fra In February 2022 Will I Still Receive The Upcoming Cola Increase
I am currently receiving survivor benefits but want to claim my own benefit when I reach FRA in Feb 2022. Will I still receive the COLA increase when I switch over to my own benefit.
Hi.. Yes. All Social Security cost of living increases that occur after a person reaches age 62 are added to their Social Security retirement benefit rate regardless of when they start drawing their benefits.
Social Security Calculation Step : Primary Insurance Amount Calculation
Now youre ready to determine the heart of your benefit your primary insurance amount . The PIA is simply the result of your benefit calculation and is generally your full retirement age benefit amount.
This is calculation is accomplished by using the bend point formula thats in effect for the year you attain age 62. If you arent 62 yet, youll need to forecast what the bend point formula amounts will be in the year you turn 62. These change annually based on the change in annual wages and generally increase at 3-4%.
There are two numbers that make up this formula which are separated into three separate bands: The amount up to the first number, the amount between the first and second number, and the amount above the second number.
The sum of these three bands is your benefit amount at full retirement age: your PIA, or Full Retirement Age benefit amount.
In the example image below we illustrate an individual with an AIME of $6,000 being applied to the bend point formula.
Read Also: Social Security Point Check
Claiming Social Security At Age 62
At age 62, the earliest point at which most people can claim benefits, youll receive around 70 percent of the amount that you would receive at your Full Retirement Age. If you were born in 1958, and your full benefit at retirement would be $1,000 a month, you would shrink your benefit to around $700 a month by retiring at age 62. Under most circumstances, once you claim your benefit, it stays at that amount for the rest of your life. Consequently, by retiring early you could lose out on $300 a month every month for the rest of your life.
After you turn 62, the amount of your Social Security benefit rises by about a half a percentage point each month. So, at age 63 you would receive about 77 percent of your benefit
If you work after claiming your benefit, one of two things can happen:
- If you earn less than the earnings limit, which for 2020 is $18,240, then your benefits will not be affected.
- If you earn more than the earnings limit, Social Security will deduct $1 for each $2 you earn over the limit. Social Security will, after full retirement, adjust your benefit to reflect this deduction so the money will eventually be restored to you.
Do Survivor Benefits Increase After Full Retirement Age
If you are the surviving spouse who is claiming benefits based on your deceased partner’s work record, there is no benefit to waiting until after FRA to claim your benefits. You do not earn delayed retirement credits, so your benefit will not increase.
However, if you are the higher-earning spouse, delaying your claim for benefits until after FRA can result in your widow receiving more monthly income, as your widowed partner will receive the higher of the two monthly benefits you were each receiving.
Recommended Reading: Can I Locate Someone By Their Social Security Number
Adjust Your Primary Insurance Amount If You Claim Benefits Before Or After Full Retirement Age
All the above calculations determine the primary insurance amount if you claim benefits at full retirement age but you may decide to claim benefits before or after FRA. You can claim benefits as early as age 62. But if you claim benefits before FRA, your benefits are decreased by:
- 5/9 of 1% per month for each month prior to FRA for the first 36 months
- 5/12 of 1% per month for each additional month if you claim more than 36 months before FRA
If you claim benefits after FRA, benefits are increased by 2/3 of 1% for each month you wait up until age 70.
The table below shows FRA depending on your birth year:
|If You Were Born in||Your FRA Is|
Table source: Social Security Administration.
Depending when your FRA is, youd apply the benefits reduction or increase to your primary insurance amount. For example:
- If FRA is 67 and you claim benefits at 66, thats 12 months early. Multiply the per month-reduction *.01) times 12 months to see that benefits are reduced by around 6.7%.
- If FRA is 66 and you claim benefits at 62, thats 48 months early. Multiply the per month-reduction for the first 36-months *.01) times 36 months + the additional reduction of *.01) times 12 months. This gives you 0.20 + 0.05, which amounts to a 25% reduction in your primary insurance amount.
- If FRA is 67 and you claim benefits at 69, thats 24 months late. Multiply the per-month increase *.01) times 24 months to see benefits are increased by 16%.
Average Indexed Monthly Earnings
The purpose for indexing your earnings is to reflect the change in wage levels that occurred during your working years. This ensures that your benefits will reflect the rise in the standard of living that occurred during your working lifetime. Out of your entire earnings from age 22 to 62, your highest 35 years of indexed earnings are used in the AIME computation. If you work and are age 25 or above, you can find your specific earnings in the social security statement that is mailed to you annually.
Indexing your earnings depends on the year in which you are first eligible to receive retirement benefits, which is age 62. So if you reach age 62 in 2011, then that is your year of eligibility. However, your earnings are always indexed to the average wage index two years before your year of eligibility, or when you reach age 60. So if you reach age 62 in 2011, then earnings from your prior working years would be indexed to the average wage index for 2009, which is 40,711.61. You can find the wage index for a specific year here.
Following this example of a worker whose earnings are indexed to the wage index for 2009, earnings in each year before 2009 would be indexed by multiplying the earnings for that prior year by the indexing factor for that prior year.
Earnings in the year you reach age 60 and later would not be indexed, but rather are taken at face value.
You May Like: Social Security Enter Reset Code
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.
Delaying Social Security Benefits
You can start collecting benefits at age 62, but that doesnt mean you should. Heres why: Each year you can wait increases your annual benefit amount by 7% to 8%, up to age 70. That could make a difference of thousands of dollars for your retirement income.
Before you decide:
- Consider your individual financial situation.
- If married, coordinate your claiming strategy with your spouse. For example, to maximize the benefit for a surviving spouse, the higher earner should wait as long as possible before claiming benefits.
Should You Jump On The Retirement Bandwagon
If youre thinking about retiring, an estimated 6% COLA hike might tempt you to throw in the towel at work and claim Social Security benefits at 62. But heres why you dont want to do that.
And she uncovered something most people dont know.
Her take is that anyone who is age 62 or older in 2022 and who is eligible for Social Security will profit from next years COLA even if they have not yet filed for benefits.
I worry that some people may rush to claim Social Security this year to benefit from the exceptionally large cost-of-living adjustment expected next January, Franklin told me by email.
Im sure most people do not realize that they automatically will benefit from next years COLA even if they have not yet filed for Social Security as long as they are at least 62 or older in 2022, said Franklin, who wrote Maximizing Social Security Benefits, an online book that is available for $29.95 at MaximizingSocialSecurityBenefits.com.
If there are future inflation adjustments, she noted, those who are 62 and older would see inflation adjustments baked into future payments each year until they claim benefits all the way up to when they reach age 70.
She points out that the Social Security Administration notes: Youre eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you dont get benefits until your full retirement age or even age 70.
Those who turn 62 next year and afterward face another issue, too.
When Medicare Comes Into The Mix
Age 65 is when Medicare eligibility begins. This doesnt mean you have to enroll in Medicare at 65 on the nose. If youre still working at that point and have access to an employer health insurance plan, you can hold off on registering for Medicare without incurring penalties. But if you dont have access to a health plan through an employer, signing up for Medicare at 65 not only makes sense, but could make it so that Part B, which covers outpatient care, is less expensive throughout your retirement.
That said, you dont have to sign up for Medicare and Social Security at the same time. And you may not want to.
Recommended Reading: 154 Pierrepont Street Social Security
How Does Work Affect Your Social Security Payments
Many people continue to work beyond retirement age, either by choice or out of necessity. But if you are receiving Social Security benefits, you need to be aware of how working can affect your benefit payments. Earning income above Social Security thresholds can cause a reduction in benefits and mean your benefits will be taxed.
Whether it makes sense to work and collect Social Security at the same time is a complicated assessment that depends on how much you earn and when you begin taking Social Security benefits.
Local Elder Law Attorneys in Your City
If you work and are full retirement age or older, you can earn as much as you want and your benefits will not be reduced. However, individuals may begin taking Social Security retirement benefits early beginning at age 62. If you are younger than full retirement age, there is a limit to how much you can earn and still receive full benefits. If you earn more than $18,960 , Social Security will deduct $1 from your benefits for each $2 you earn over the threshold. In the year you reach full retirement age, you can earn up to $50,520 without having a reduction in benefits. However, if you exceed $50.520 in earnings, Social Security will deduct $1 from your benefits for each $3 you earn until the month you reach full retirement age. Once you reach full retirement age, your benefits will no longer be reduced.
For more information on Social Security, .
Read Also: How Can I Check My Social Security Status
Special Rule As You Approach Full Retirement Age
If you are already receiving your retirement benefits, a special higher earnings limit applies in the calendar year you turn your full retirement age . If you will reach full retirement age in 2021, you can earn up to $4,210 per month without losing any of your benefits, up until the month you turn 66. But for every $3 you earn over that amount in any month, you will lose $1 in Social Security benefits. Beginning in the month you reach full retirement age, you become eligible to earn any amount without penalty.
If you are self-employed, you may receive full benefits for any month during this first year in which you did not perform what Social Security considers “substantial services.” The usual test for whether you worked substantial services is whether you worked in your business more than 45 hours during the month . In other words, if you work in your business more than 45 hours in a month, Social Security may reduce your benefit.
You May Like: What Is Needed To Get Your Social Security Card
Early Or Delayed Retirement
Once your PIA is calculated, you now have the basis of determining your estimated monthly benefit amount. This amount, however, also depends on the actual age that you retire. The earliest that you can retire and receive benefits is age 62. But the downside to early retirement is that your benefits are reduced for each month that you retire before your normal retirement age.
The normal retirement age is the age that you receive the full benefits as indicated by your PIA, and it depends on the year you were born. You can find your specific retirement age here, but for most people reading this, the normal age is now 67. Conversely, if you delay your retirement beyond your normal retirement age, you will receive a certain percentage increase for each month that you delay retirement beyond your normal age. Here are the specifics:
If you were to retire early, your benefit would be reduced by 0.555% for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 0.416% per month for each month thereafter. This result is then rounded down to the next dollar to arrive at your reduced monthly benefit.
On the other hand, for most of us reading this, if you were to delay retirement beyond your normal retirement age, youd receive an increase in your PIA of 0.666% per month of delayed retirement, or 8% a year. The specific percentage of your increase, which is based on your year of birth, can be found here.