How Much Do Part A Premiums Cost
If you paid Medicare taxes for under 30 quarters, the Part A premium is $471 in 2021. Those who paid Medicare taxes for 30 to 39 quarters will pay $259 per month in premiums. Please note that, if you have to pay monthly Medicare premiums, you cannot qualify for Social Security benefits. In that case, you will not have to worry about money being taken out for now.
The Impact Of Early Retirement On Calculated Social Security Benefits
Its crucial to recognize that the standard Social Security statement projects benefits assuming continued work, as it means that not working as late as full retirement age can reduce prospective benefits. Not because future benefits are actually reduced by stopping work early . But simply because projected statements assume continued work by default, such that its absence will still result in a lower actual benefit in the future than what was previously projected.
However, the actual impact on Social Security benefits of stopping work before full retirement age varies heavily, depending on what the prospective retiree had already earned in benefits or more specifically, what additional years of work would have done to that individuals highest-35-years earnings history.
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 .
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What Is The Social Security Benefits Formula For 2019
The Social Security benefits formula that applies to determine your primary insurance amount is the formula in effect when you turn 62. The percentage of AIME you receive never changes, but the bend points do. In 2019, the bend points are $926 and $5,583. So, if you turn 62 in 2019, the Social Security benefits formula that would apply to determine your benefits is:
- 90% of the first $926 in AIME
- 32% of the amount of AIME between $926 and $5,583
- 15% of the amount equal to or greater than $5,583 in AIME
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You Can Claim Social Security Benefits Earned By Your Ex
Just because you’re divorced doesn’t mean you’ve lost the ability to get a Social Security benefit based on your former spouse’s earnings record. You can receive a benefit based on his or her record instead of a benefit based on your own work record if you were married at least 10 years, you are 62 or older, and single.
Like a regular spousal benefit, you can get up to 50% of an ex-spouse’s benefit — less if you claim before full retirement age. And the beauty of it is that your ex never needs to know because you apply for the benefit directly through the Social Security Administration. Taking a benefit on your ex’s record has no effect on his or her benefit or the benefit of your ex’s new spouse. And unlike a regular spousal benefit, if your ex qualifies for benefits but has yet to apply, you can still take a benefit on the ex’s record if you have been divorced for at least two years.
Note: Ex-spouses can also take a survivor benefit if their ex has died after the divorce, and, like any survivor benefit, it will be worth up to 100% of what the ex-spouse received. If you remarry after age 60, you are still eligible for the survivor benefit.
A claiming strategy if youre divorced: Exes at full retirement age who were born on January 1, 1954, or earlier can apply to restrict their application to a spousal benefit while letting their own benefit grow.
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Checking Your Social Security Earnings Record
How confident are you that your Social Security earnings record is accurate?
Unless youve checked it recently, you shouldnt be too sure.
Mistakes in an individuals Social Security earnings record are actually much more common than most people think. In tax year 2012 alone, the Social Security Administration reported $71 billion in wages that could not be matched to an individuals earnings record! The good news is that the Social Security Administration has a system for sorting out some of these mistakes and assigning the earnings to the correct record. But nearly half of the mismatches are never corrected. That means that in 2012 there were approximately $35 billion in wages that was never credited to an individuals Social Security history.
There Are Social Security Benefits For Surviving Spouses And Children
If your spouse dies before you, you can take a Social Security survivor benefit, but not 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, but the benefit will be reduced because it’s taken before full retirement age. If you remarry before age 60, you cannot get a survivor benefit. But if you remarry after age 60, you may be eligible to receive a survivor benefit based on your former spouse’s earnings record.
Eligible children who are under age 18 or were disabled before age 22 can also receive a Social Security survivor benefit, worth up to 75% of the deceased’s benefit.
Why Do I Need To Know How To Calculate My Social Security Benefits
So you may be thinking, Why do I need to know how to calculate my own Social Security benefits? After all, the SSA will give me an estimate at any time.
Thats true! You can go to your My SSA account online and see an up-to-date copy of your benefits estimate. So why would you need to know how to do this calculation on your own?
Its important for a few reasons.
First, it never hurts to understand the mechanics behind an income stream thatll probably be a large part of your overall retirement income.
Secondly, your benefits estimate from the Social Security Administration is probably wrong. This is because their estimation methodology has two serious flaws: 1) They assume your future earnings wont increase2) They use todays social security formula
This means that these estimates are less accurate for younger workers but more reliable for workers who are close to retirement.
So, understanding how to do this calculation is especially important if you plan to retire early or later than normal or if you have a significant earnings change in the last few years of working.
To do this calculation, there are only four steps.
Checklist For Your Social Security Claiming Strategy
- Know your numbers. Find out your FRA, earnings history, and estimated benefits.
- Stay current. Sign up for your most current statements on SSA.gov.
- Do the math. Use calculators on SSA.gov to check out your monthly benefit options.
- Get the facts. Don’t succumb to myths use primary resources such as SSA.gov.
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When Should I Take Social Security To Maximize My Benefits
Maximize My Social Security is a tool developed exclusively by Economic Security Planning, Inc.This is not a Social Security Administration website.
- Find the best strategy to maximize lifetime benefits
- Making correct decisions can mean tens of thousands in extra retirement dollars
- Our state-of-the-art software helps you choose the right benefits at the right time
- Developed by Laurence Kotlikoff, Boston University Professor of Economics
- Find your maximized strategy
- Unlimited what-ifs
- Step-by-Step filing instructions
- Our software’s lifetime-benefit increase for an illustrative couple earning $65K each and planning to take retirement benefits at 62.
Results will differ based on your specific case and filing strategy.
when & how to filehighest lifetime benefits. Fully Compliant with all Laws:
Considers All Major Social Security Benefits
- Retirement Insurance Benefits
- Divorced Spouses Insurance Benefits
- Social Security Disability Insurance Benefits
- Child In-Care Spouses Insurance Benefits
- Widows Insurance Benefits
- Divorced Widows Insurance Benefits
- Childs Insurance Benefits
- Surviving Childs Insurance Benefits
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Covers All Major Social Security Benefits Rules
Developed by Social Security Expert Laurence Kotlikoff
Deciding which Social Security benefits to take and when to take them is one of the most important and complex decisions you must make.
It is the nation’s premier tool for maximizing your lifetime Social Security benefits.
How Much Is Taken Out Exactly
There is no standard amount that is taken out of your Social Security check when you sign up for Medicare. Instead, the amount deducted depends on several factors. Each part of Medicare has a different cost. On top of this, Part C and Part D are offered by private plans, which means their monthly premiums vary even more.
Although there are standard monthly premiums for Part A and Part B, the amount changes slightly each year. There are also additional costs that you may have to pay depending on your income level. We discuss these in more detail below.
To find out how much will be taken from your check, you need to refer to some specific parts of Medicare.
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Other Benefits Will Be Delayed If You Delay Your Old Age Security Payment
If you are not in receipt of the Old Age Security pension:
- you cannot get the Guaranteed Income Supplement
- your spouse cannot apply for the Allowance
Note: The Guaranteed Income Supplement and Allowance amounts dont increase when you delay receiving Old Age Security pension payments. You cannot receive the Guaranteed Income Supplement and your partner cannot receive the Allowance when you are not receiving the Old Age Security pension.
When monthly increases are not applied
If you decide to delay receiving the Old Age Security pension, you will not receive monthly increases during any month where you are:
- in federal prison as a result of a sentence of 2 years or longer
- outside Canada, have less than 20 years of residence in Canada and do not qualify under an international social security agreement
Theres An Annual Social Security Cost
One of the most attractive features of Social Security benefits is that every year the government adjusts the benefit for inflation. Known as a cost-of-living adjustment, or COLA, this inflation protection can help you keep up with rising living expenses during retirement. The Social Security COLA is quite valuable its the equivalent of buying inflation protection on a private annuity, which can cost a pretty penny.
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 will see a 1.3% COLA in their monthly Social Security benefits.
The Kiplinger Letter forecast in March that the 2022 COLA would be 3%, which would be the largest increase since 2012 when Social Security benefits ticked up 3.6%.
Heres what COLAs have been in other recent years:
- 2009: 5.8%
- 2021: 1.3%
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Complicating Factors: Spousal Benefit Reductions
An assortment of other factors can come into play, which could reduce your benefit as a spouse. For example:
- If you are receiving a retirement benefit of your own, your spousal benefit will be reduced.
- If you file for spousal benefits prior to your full retirement age, your spousal benefit will be reduced.
- If you are receiving a government pension from work that wasnt covered by Social Security taxes, your spousal benefit will be reduced by the government pension offset.
- If your spouse is disabled or if you have a minor child or adult disabled child, the family maximum rules may result in your spousal benefit being reduced.
- If you are collecting a spousal benefit while under full retirement age and you are working, the earnings test may result in some or all of your spousal benefit being withheld.
We will discuss the GPO, family maximum rules, and earnings test in other articles. For now, we will discuss only the first two potential sources of reduction: entitlement to your own retirement benefit and filing prior to full retirement age.
Claiming Social Security Benefits At The Right Time Means More Money In Your Pocket Heres 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. Maximizing that stream of income is critical to funding your retirement dreams.
The rules for claiming Social Security benefits can be complex, but this guide will help you wade through the details. By educating yourself about Social Security, you can ensure that you claim the maximum amount to which you are entitled.
Here are 12 essential details you need to know.
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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.
How Cola Increases Evolved Over Time
Each year, the SSA announces any increases to Social Security benefits, known as COLA, to help recipients keep up with rising prices. The increases are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers , which is the official measure of the monthly price change in goods and services. Annually, the SSA compares the CPI-W for the third quarter of the previous year and current year to determine the COLA increase.
While COLA adjustments are now automatic, this was not always the case. Beneficiaries received their first COLA adjustment in October 1950. A second increase was made in September 1952 through legislation. For the next 20 years, recipients only saw their benefits increase if Congress approved it.
In 1972, Congress passed legislation to provide automatic increases linked to a rise in consumer prices. Recipients would no longer have to wait for Congress to take action to receive an increase. The first automatic increases to Social Security benefits took effect in 1975. After 1982, COLA adjustments were effective for December of each year and received by beneficiaries in January.
Here is a history of COLA increases from 1975 to 2021:
|Social Security Cost-Of-Living Adjustments|
Retiring Early From Rising Income Above The Highest 35 Years Of Earnings
On the other hand, if the prospective retiree has more than 35 years of historical earnings, but not all of those prior years were as high as today, there may still be some prospective impact to retiring early. In this case, its because the additional years of work are replacing prior years in the calculation of the highest 35 years of benefits. Which means eliminating them from the projection by retiring early loses out on some opportunity for increasing benefits.
For instance, the chart below shows the historical earnings of an individual who has been in his peak earnings years since a big promotion in his mid 50s, and is trying to decide whether to retire early at age 60. His current Social Security statement projects his retirement benefits to be $2,374.24, which implicitly assumes he will keep earning his $110,000/year salary until full retirement age, which means 6 more years of knocking out his $40,000/year earnings from back in his 20s.
Of course, the reality is that the prior $40,000/year of earnings will still be included in his Social Security benefits, if he stops working early and doesnt replace them with later earnings. However, that means at the margin, each year he continues to work replaces an old $40,000/year salary with a new $110,000/year salary, a $70,000 difference that increases the 35-year AIME average by $70,000 / 35 = $2,000/year .