Calculating Social Security Retirement Benefits

The Recalculation Of Social Security Benefits

Since a recalculation of benefits is the least common method the SSA will use, lets quickly cover that. Then well move on to the much more common recomputation of benefits.

A recalculation is only performed to correct a benefit that was calculated with incorrect or missing earnings . For example, if there were earnings included in your initial benefits computation that was found to be incorrect, your benefit would be recalculated. And again, remember that a recalculation can increase OR decrease your benefit.

Calculating Your Primary Insurance Amount Using The Wage Indexing Method

While the wage indexing method works to calculate retirement, survivors, and disability benefits, calculating disability benefits is slightly different. So the following applies only to calculating PIA for retirement and death.

Follow these steps to calculate your PIA:

Step 1Count the number of years between 1951 and the year you turned 61. If you were born in 1929 or later, it will be 40.

Example: Julie retired from her job in 1992 when she was 62. She turned 22 in 1952, so the number of years between 1952 and 1991 , equals forty.

Step 2Use the number of elapsed years to figure out the number of benefit computation years by subtracting five. The result will be used to calculate your average indexed monthly earnings . If you were born in 1929 or later, this number is 35.

Step 3Use your earnings record to calculate your indexed earnings by using the appropriate table to determine what the indexing average wage was or will be the year you turn 60. Then, look to see what the indexing average wage was in the year you are indexing. These figures become part of an indexing ratio applied to each year of earnings starting with 1951 and ending with the year you turn 59. The indexing ratio can be expressed as the actual earnings in the year being indexed multiplied by the indexing average wage in the year you turned 60, divided by the indexing average wage in the year being indexed. The result will equal your indexed earnings for the year being indexed.

Do You Expect To Live A Long Life

Many people live longer than they expect.

Because Social Security provides guaranteed income for life, it’s especially valuable to you when you reach age 80 and beyond. Claiming benefits at your full Social Security benefit age or later could be a good way to secure your monthly income during your later years. Your benefit increases the longer you wait to claim, up to age 70, and is adjusted annually with the cost of living. If you live into your 80s but claim at age 62 instead of your full retirement age or later, your total lifetime benefits will be lower by thousands of dollars.Calculate your expected longevity.

Claiming at your full benefit age could still make sense for you.

We understand it’s difficult to make predictions. You may want to plan for the possibility that you may spend 20 or more years in retirement. On average, a woman reaching age 65 today will live to age 87, and a man will live to age 84. Waiting to claim as long as you can could still make sense for you if you are married, are the higher earner in the household, and want your surviving spouse to keep the highest monthly benefit after you die. Remember, you can claim at any point between age 62 and 70. Each additional month that you wait to claim gives you a permanent increase in your monthly benefit which becomes more valuable as you age.Calculate your longevity.

There’s a good chance that you’ll live into your 80s and beyond.

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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 tools 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.

Social Security Disability Benefits

If you are approved for disability benefits, you can receive a monthly payment for as long as the disability continues. The formula for disability benefits is not quite as straightforward as the formula for retirement benefits. However, disability payments are still based on your average indexed monthly earnings. The more money you have paid into the system and the longer you have paid, the more money you can receive in monthly benefits.

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Adjust Your Pia For The Age You Will Begin Benefits

The final amount of Social Security retirement benefit that you receive is based on the age when you begin benefits.

The earliest you can begin retirement benefits is age 62 . You will get more by waiting until a later ageas late as age 70to begin receiving benefits.

Of course, another complex formula is used to determine how much more you will receive if you wait.

This formula uses your Primary Insurance Amount calculated in the previous step. This is the amount you will get if you start benefits at your full retirement age . Your FRA can vary, depending on the year you were born. For people born between 1943 and 1954, as in our example, the FRA is age 66.

For people born on January 1, the FRA is based on the year prior. Someone born on January 1, 1955, will have an FRA based on 1954.

A reduction is applied to your PIA if you begin benefits before your FRA. A credit, referred to as a delayed retirement credit, is applied if you begin to receive benefits after your FRA.

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How Do I Increase My Social Security Benefits After Retirement

To increase your monthly benefit, don’t start taking Social Security payments right when you reach full retirement age. The longer you wait, the more you’ll get each month. If you want to get the highest possible amount of Social Security benefits each month, you need to wait until age 70 to retire.

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Social Security Bend Points

The Social Security benefits formula is designed to replace a higher proportion of income for low-income earners than for high-income earners. To do that, the formula uses what are called bend points,” which are adjusted for inflation each year.

Bend points from the year you turn 62 are used to calculate your Social Security retirement benefits. The example in the table below uses 2020 bend points. It works like this:

• You take 90% of the first $960 of AIME.
• You take 32% of the next $5,785 of AIME.
• You take 15% of any amount over that $5,785.
• You total those three numbers.

The result is your primary insurance amount, or PIA, the amount you will receive if you begin benefits at your Full Retirement Age .

Your PIA is rounded to the next lowest dime, and your benefit amount is rounded to the next lowest dollar.

Who Is Eligible To Collect Social Security Retirement Benefits

Workers who are at least age 62 and who have worked at least 10 combined years at jobs for which they paid Social Security taxes are eligible for Social Security retirement benefits. In many cases, spouses, widows and divorcees are eligible for Social Security retirement benefits based on a spouses or ex-spouses earnings history. Unmarried children 18 and younger can also get survivors benefits. You must be a U.S. citizen or lawful alien to collect benefits.

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When Will You Collect

The SSA calculates your benefit amount at your full retirement age . This depends on the year you were born. FRA by birth year is:

• 19431954: age 66
• 1955: age 66 and two months
• 1956: age 66 and four months
• 1957: age 66 and six months
• 1958: age 66 and eight months
• 1959: age 66 and 10 months
• 1960 and later: age 67

Determine Your Wages For Each Year Youve Worked

The federal government keeps track of how much money youâve paid Social Security taxes on each year in your earnings record. You can view this in your my Social Security account.

For most people, their actual income and the income theyâve paid Social Security taxes on are the same. But this isnât always the case with high earners. In 2022, for example, you only pay Social Security taxes on the first $147,000 you earn. In 2023, this amount increases to $160,200. So if your earnings record shows $147,000 for 2022, thatâs not a mistake, even if your actual income for the year was much higher.

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How Your Benefit Amount Is Determined

Your average lifetime earnings, otherwise known as your Primary Insurance Amount , determine your Social Security benefits. As you can guess, calculating your PIA is complicated because some factors in the formula change annually. Its easiest to get that benefit estimate directly from the SSA, however, knowing how your PIA is calculated is useful in retirement planning. Currently, the two most frequently used PIA calculation methods are:

The simplified old-start benefit methodEvolved from the original 1939 Act formula, this method is used if, prior to 1979, you turned 62 years old, became disabled, or death occurred prior to 1979. It averages actual earnings and uses a table to calculate PIA.

The wage indexing methodIn use since 1979, this method indexes earnings to adjust them to reflect changes in wage levels throughout years of employment, ensuring that your benefits reflect increases in the standard of living. Through this method, your PIA is reached by indexing lifetime earnings up to and including the year you turn 59. Then, your PIA is calculated by averaging your highest earnings for a specific number of years and a benefit formula is applied.

How Inflation Impacts Your Pia

Your PIA is calculated at age 62. If you wait beyond age 62, cost-of-living adjustments will be applied to your PIA for each year afterward.

If you have already had most of your 35 years of earnings, and you are near age 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cost-of-living adjustments. Many people do not account for this when doing their own calculations, which can lead them to think that taking Social Security early is a better deal, when waiting is often the better deal.

In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits.

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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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What Income Reduces Social Security Benefits

If you start taking Social Security benefits before you reach full retirement age, any income you earn over the annual limit until you reach full retirement age will lower your benefit eligibility for that year. In 2022, if you are retired and haven’t reached full retirement age, the SSA will deduct $1 from your benefits for every $2 earned over $19,560. In the year you reach full retirement age, the SSA will deduct $1 for every $3 earned over $51,960. For the 2023 tax year, these thresholds are slightly higher, at $21,240 and $56,520, respectively.

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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.

How Social Security Benefits Are Projected At Retirement

As noted earlier, Social Security benefits are calculated as an income replacement rate based on 35 years of your historical earnings . Which means when youre just getting started in your career as a teenager or 20-something, most of your 35-year average of earnings would be $0s, and any projection of Social Security benefits based on actual earnings would be near $0 in the early years. You wouldnt really know how well your Social Security benefits were on track to replace your income in retirement until you actually had 35 working years to see the cumulative benefit .

Accordingly, the Social Security Administration provides a regular statement to project future Social Security benefits, assuming that you will continue to earn at your current income level . This is shown as your estimated taxable earnings per year after 2017 on the front page of the Social Security benefits statement. And projected benefits on the Social Security statement assume that amount will continue to be earned in every year until full retirement age which can substantially change the individuals historical earnings for calculating benefits .

Example 2. Andrew is a 32-year-old whose income has averaged about $35,000/year over the past 12 years . For the past 2 years, his annual salary is up to $48,000/year.

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Compare Two Application Ages

Use the following calculation to compare the financial difference between two Social Security retirement benefit application ages. The U.S. Social Security website provides estimated benefit payment amounts of different claim ages.

The term âSocial Securityâ is used in the U.S. to refer to the system that provides monetary assistance to people with inadequate or no income. The term can be better understood by thinking of it as the âfinancial security of society.â Although they may not go by the same name, there are many similar government systems in place throughout the world. This calculator is specifically intended for U.S. Social Security purposes.

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