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 âbend pointsâ 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 âA Social Security Ownerâs 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 To Calculate The Impact Of A Benefit Cut
Covisum, a provider of Social Security claiming software, recently updated its calculator to reflect the Social Security trustees’ latest projections. That includes a free version for consumers and a more complex paid version for financial advisors.
Another product, Maximize My Social Security, lets consumers evaluate which claiming strategy might best suit them for a $40 annual fee. It also has a separate version for financial advisors.
The free Covisum calculator can help individuals do a quick calculation based on their benefits alone and some key facts year of birth, full retirement age benefit amount, percentage of the benefit cut and the year that benefit cut occurs.
So someone turning their full retirement age this year, for example, can calculate the effect of a 23% reduction in benefits starting in 2034, as well as the effect of no benefit cut.For each scenario, the calculator will show the value of claiming either at age 65 or age 70, and when beneficiaries stand to get the maximum amount possible from the program.As beneficiaries live longer, the value of waiting to claim until 70 goes up, as demonstrated in the difference in total benefits per the tool’s calculations.
To be sure, the free calculator is just a starting point when it comes to getting a sense of the trade-offs when claiming Social Security, according to Joe Elsasser, founder and president of Covisum.
Myth #: Your Benefits Are Based Only On Wages You’ve Earned Before Age 65
How your Social Security benefit is calculated can seem mysterious. However, it’s important to know a few essential facts to aid your claiming strategy. You can use the tools on SSA.gov to do the calculations.
- Your benefit is calculated based on your highest 35 years of earnings they don’t have to be consecutive years or before age 65.
- If you work past age 65, those earning years will be included, so long as they are high enough to be part of your highest 35 years.
- Even working part-time after turning 65 may be part of your highest 35 years of earnings.
- To be eligible for Social Security, you must have a minimum of 10 years of covered employment , which equates to 40 credits in the Social Security system.
- If you don’t have 35 years with earnings, zeros will be included in the calculation.
Read Viewpoints on Fidelity.com: Social Security tips for working retirees
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Who Is Eligible For Social Security Benefits
Anyone who pays into Social Security for at least 40 calendar quarters is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that – you can put it off as late as age 70 – youâll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.
The bottom line: Youâre eligible for Social Security Benefits if youâve paid into the system for at least a decade, but your actual benefits will depend on what age â between 62 and 70 â you begin to claim them.
Does The Increase Mean You Should Take Social Security Now Rather Than Wait
On the positive side, the annual COLAs are gifts that keep on giving. After a person reaches age 62, the increases are added automatically, regardless of when an older person starts taking their benefits.
Plus, the raises are cumulative. So a 8.7% increase in 2023, the next increase will be based on that total.
If youre getting or are planning to take spousal, survivor or divorced spouse benefits, youll receive this increase and subsequent increases no matter when you sign up.
In other words, theres no hurry to expedite the date when you take your benefits, Kotlikoff says.
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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:
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.
What Does Aarps Social Security Calculator Do
The calculator provides an estimate of your Social Security benefits, based on your earnings history and age. Our tool also helps you see what percentage of daily expenses your payments can cover, and how you can increase your benefits by waiting to collect. It can also tell you how your retirement earnings will be affected if you keep working after you claim your Social Security benefit.
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Is Social Security All You Need To Retire
Generally not. Social Security is not intended to be your only source of retirement income. On average, beneficiaries receive about 40% of their pre-retirement income through Social Security benefits. According to the Social Security Administration, most financial advisers say youll need at least 70% of your pre-retirement income to comfortably meet your expenses in retirement.
Here are few other ways to save for retirement:
Four Ways Benefits Can Be Increased Or Decreased
There are four ways the starting benefit can be permanently increased or reduced from the PIA calculated at age 62:
- Starting benefits earlyBenefits may begin as soon as age 62, but they are permanently reduced for every month between the onset of benefits and FRA.
- Delaying benefits beyond full retirement ageDelayed retirement credits can permanently increase benefits, and they are awarded for every month between FRA and a later onset of benefits.
- Starting early and continuing to workIf you start benefits before your FRA and keep working, the SSA may deduct the part of your benefits that exceeds a threshold. However, any such deductions are not permanent. When you reach your FRA, the SSA recalculates your benefits and credits back any deductions.
- Continuing to work, periodEven if you dont start benefits early, you can increase your benefits by continuing to work up to any age. Any year in which your indexed earnings are higher than one of your 35 previous highest years will boost your benefits. However, after age 60, you will not receive wage indexing, and after age 62, you will not receive bend point inflation indexing.
All four points are related to your starting Social Security benefits. Keep in mind that when your benefits start, the COLA will increase them annually. If you start benefits at age 66, your PIA automatically increases with the applicable COLAs from the years in which you turn 63 through 66.
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Should I Claim Social Security Earlier Than Planned To Take Advantage Of This Cola
In a word, no. If you are 62 and over, you will benefit from this COLA regardless of whether you have claimed your benefits or not. Thats because, starting the year you turn 62, the COLA is applied to your Primary Insurance Amount , the amount you would receive if you claim at your full retirement age, which is 67 for those born in 1960 or later. It doesnt matter if youre collectingyou still get it applied, said Martha Shedden, president and co-founder of the National Association of Registered Social Security Analysts.
If you claim before your full retirement age, your benefits will be reduced, but theyll be reduced off a higher base thanks to the COLA. If you claim beyond full retirement age, your benefits will be boosted off their higher base by delayed retirement credits. Its still good to wait, Shedden said.
Will Your Expenses Decrease After You Retire
Retirement could be more expensive than you expect.
If you’re planning an active retirement or carry a mortgage or other debt, retirement may be more expensive than you expect. Some regular expenses like your out-of-pocket health care costs will likely increase as you get older. You can protect your retirement lifestyle by reducing your largest expenses. You can also increase your regular income by claiming at your full Social Security benefit age or later. If you claim earlier, your monthly benefit could be reduced by as much as 30 percent.Create a retirement budget.
Retirement could be more expensive than you expect.
If you’re planning an active retirement or carry a mortgage or other debt, retirement may be more expensive than you expect. Some regular expenses like your out-of-pocket health care costs will likely increase as you get older. You can protect your retirement lifestyle by reducing your largest expenses. You can also increase your regular income by claiming at your full Social Security benefit age or later. If you claim earlier, your monthly benefit could be reduced by as much as 30 percent.Create a retirement budget.
Maintain your lifestyle by planning ahead.
Maintain your lifestyle by planning ahead.
Many people find retirement is more expensive than expected.
Many people find retirement is more expensive than expected.
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Maximum Social Security Benefits You Can Get
The maximum monthly Social Security benefit available to someone retiring in 2021 is $3,895, which assumes that:
- They worked 35 years or more
- In their 35 top-earning years, their income met or exceeded the SSA’s maximum taxable amount, so that they paid the largest Social Security tax amount possible for each of those years
- They are retiring at age 70, which entitles them to the maximum delayed retirement credit
For comparison, the table below lists the monthly benefits for workers who plan to retire in 2021 whose earnings met or exceeded the SSA maximum-taxable limit every year of their working lives, from age 22. This situation is far from typical, but it shows the impact of retirement age on Social Security benefits, isolated from other factors.
| Maximum Social Security Benefit for Workers Retiring in 2021 |
|---|
| Age |
Im Not Collecting Social Security Yet How Does This Affect Me
Dont worry! When you file for Social Security benefits, the SSA will calculate your PIA and then increase it based on the sum of the COLA increases between the time you turned 62 and the age you applied for benefits.
If you havent filed yet, delayed retirement credits accumulated by filing after your full retirement age on top of COLAs can significantly boost your monthly benefit amount. Thats another argument for delaying filing until your benefits max out at age 70 if you can.
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How Does The Social Security Administration Calculate Benefits
Benefits also depend on how much money youâve earned in life. The Social Security Administration takes your highest-earning 35 years of covered wages and averages them, indexing for inflation. They give you a big fat âzeroâ for each year you donât have earnings, so people who worked for fewer than 35 years may see lower benefits.
The Social Security Administration also makes annual Cost of Living Adjustments, even as you collect benefits. That means the retirement income you collect from Social Security has built-in protection against inflation. For many people, Social Security is the only form of retirement income they have that is directly linked to inflation. Itâs a big perk that doesnât get a lot of attention.
How Do Benefits Work And How Can I Qualify
While you work, you pay Social Security taxes. This tax money goes into a trust fund that pays benefits to:
- Those who are currently retired
- To people with disabilities
- To the surviving spouses and children of workers who have died
Each year you work, youll get credits to help you become eligible for benefits when its time for you to retire. Find all the benefits Social Security Administration offers.
There are four main types of benefits that the SSA offers:
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How The Social Security Cola Affects Medicare Costs
A 8.7% Social Security COLA for 2023 might result in some higher-income earners paying more for Medicare Part B and Part D benefits.
While the income-related monthly adjustment amount thats used to determine Part B and Part D premiums is adjusted for inflation, a couple filing jointly and making just a few dollars over one of Medicares income thresholds can face huge premium increases.
If you earn an extra dollar or receive an extra dollar or two of Social Security, your Medicare premiums can go up by $800, $900 or $1,000 , Kotlikoff said.
With a large Social Security COLA on the way, its time to explore what youre likely to owe in taxes, says Mary Johnson, Social Security policy analyst for the Senior Citizens League.
Johnson urges all Social Security recipients to log into their My Social Security accounts, then discuss their income tax withholding with a knowledgeable financial advisor.
If you know your taxable income is going to be 10% higher than the previous year, you are going to have to adjust estimated taxes, Johnson says.
How To Estimate Your Social Security Income
Two facts are knownSocial Security benefits are not guaranteed, and some changes will be necessary to keep the system solvent in the future as millions of baby boomers retire and begin to receive their Social Security benefits. Though these facts create uncertainty, its also true that the quality of your retirement depends on your planningand you must start planning somewhere.
A good starting point is to figure out the dollar amount of the retirement benefits to which all of your years of Social Security contributions entitle you under current law. There are four ways to do this:
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At What Age Do You Plan To Retire
The age at which you retire can have a major effect on the size of the Social Security benefits youll receive. The longer you wait up until age 70, the more benefits you may be able to collect.
Enter the age at which you would like to retire and begin collecting benefits. You can get retirement benefits as early as age 62.
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