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How Is Calculated Social Security Benefits

When Should I Start Collecting Social Security

How to Calculate Your Social Security Benefits

Ultimately, the decision of when to begin collecting Social Security is one you have to make. It depends on your age, your health status, how much you spend and how much you have saved. Its generally best to start collecting as late as you can, because you get a larger monthly payment, which is adjusted for inflation each year.

Consider a retiree who was born in 1950 and averaged $50,000 a year in salary. If she has $3,000 a month in expenses, her Social Security check would cover 48 percent of her expenses if she started Social Security at age 62. If she waited till age 70, her check would cover 85 percent of her expenses. Every year she delays retirement, her Social Security payout which is adjusted annually for inflation rises by about $1,649.

Traditionally, the retirement system in the U.S. has been a three-legged stool: Social Security, savings and pensions. Social Security was never intended to be the sole source of income for retirement. Increasingly, however, employers have been moving away from their employer-sponsored pension plans in favor of tax-deferred retirement savings accounts, such as 401 plans.

Who Qualifies For Social Security Spousal Benefits

If your spouse has filed for Social Security benefits, you can also collect benefits based on the spouse’s work record, if:

  • You are at least 62 years old.
  • Regardless of your age, if you care for a child who is entitled to receive benefits on your spouses record, and who is under age 16 or disabled.

When you apply for spousal benefits, you will also be applying for benefits based on your own work history. If you’re eligible for benefits based on your own earnings, and that benefit amount is higher than your spousal benefit, that’s what you’ll get. If it is lower, you’ll get the spousal benefit.

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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Find Your Social Security Full Retirement Age

You can claim your Social Security benefits a few years before or after your full retirement age, and your monthly benefit amount will vary as a result. But first you have to know what it is.

Also known as normal retirement age, your Social Security Full Retirement age is the age at which youre entitled to 100% of the Social Security benefits youve earned. FRA is 66 for beneficiaries born between 1943 and 1954 it gradually increases to 67 for beneficiaries born in 1960 or later. If you take benefits before FRA, your benefits will be reduced. If you file at age 62, for example, benefits will be as much as 30% lower. More on that in a moment.

Can You Receive Retroactive Payments

Social security age calculator

Once the SSA approves your SSDI application and calculates your monthly benefit, you may be entitled to a back pay award. How many months of payments you will receive will depend on the date you applied for benefits and your disability onset date.

If you are applying for SSDI benefits, you need the assistance of a skilled Social Security disability lawyer to get your application approved and receive the benefits you deserve. To schedule a free consultation with a member of our legal team, fill out the online form on this page or call our Roswell office today.

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Understanding The Social Security Benefits Formula Is Important

Understanding the Social Security benefit formula is important, because you can shape your behavior to increase your benefits once you know the formula.

Throughout your career, you can work to increase your income so you have a higher average wage. If you have not worked for a full 35 years, you may also decide to work longer so you don’t have any years of $0 wages factored in or so you have fewer $0s figured in your average. Or, if you are earning a much higher wage at the end of your career, you could stay in the workforce longer so some years of higher wages replace years of lower earnings. Finally, you could opt not to claim benefits until at least full retirement age or later so you get at least your primary insurance amount — or more.

Since Social Security is such an important source of income in retirement, it’s worth learning how the Social Security benefits formula works and taking steps to maximize the benefits that will help support you as a senior.

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The File And Suspend Strategy

Prior to 2016, workers could file for benefits , then suspend their own benefits in order to maximize their credits for deferred filing. This so-called file and suspend strategy meant that a lower-income partner could take advantage of spousal benefits while the primary earner accrued delayed retirement credits, thereby increasing their benefit amount.

However, this “have your cake and eat it, too” loophole was closed with the Bipartisan Budget Act of 2015, which took effect in April 2016.

While it is still possible to file for benefits and then suspend payments temporarily, any other benefits that would normally be available on your account are no longer payable during such suspensions.

Read Also: Which States Tax Social Security Benefits

They Range From Simple To Sophisticated

Social Security is a government program serving about 65 million people, so you might use one word to describe it: complicated. Hats off to the Social Security Administration , though. It produces one of the best government websites, using plain English to explain its rules. It also has plenty of calculators and worksheets to help.

We pulled together some of our favorites. Keep this list handy next time youre sifting through the maze of Social Security rules and regulations. You won’t need all 11, but some of them will likely help answer some of your questions as you start to plan.

Theres An Annual Social Security Cost

How Social Security benefits are calculated on a $50,000 salary

One of the best features of Social Security benefits is that the government adjusts the benefits each year based on inflation. This is called a cost-of-living adjustment, or COLA, and helps your payments keep up with increasing living expenses. The Social Security COLA is significant. Its the equivalent of buying inflation protection on a private annuity, which can get expensive.

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 2023, Social Security beneficiaries will likely see a 9.7% COLA in their monthly Social Security benefits, the biggest increase since 1981. The COLA for 2023 will be announced on October 13.

Heres what COLAs have been in other recent years:

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Adjust Your Wages For Inflation

The Social Security Administration uses the Average Wage Index to adjust wages for inflation. The average wage index is a measure of U.S. wages. The AWI that applies to adjust your wages for inflation is the AWI in effect two years before you become eligible for Social Security. You become eligible for Social Security at 62, so you’re subject to the AWI in effect in the year you turn 60.

The table below shows the AWI for the past several years — and you can find a complete list of AWIs dating back to 1951 on the Social Security Administration website.

Year

Table source: Social Security Administration.

If you turned 62 in 2019, you’d use the 2017 AWI — $50,321.89 — to determine how to adjust each year’s wages for inflation. The formula to adjust your wages requires you to:

  • Divide the AWI in effect the year you turn 62 by the AWI in effect in the year you’re adjusting the wages for. This will give you the indexing factor.
  • Multiply the relevant year’s wage by the indexing factor to determine your inflation-adjusted wage.

Here’s how this formula works in practice:

Do this math for each year you have earnings to figure out that year’s index-adjusted wage.

The Social Security Administration also lists indexing factors on its website for the current eligibility year. You can look up the indexing factors that apply and multiply each year’s indexing factor by the relevant year’s wages. This will give you your index-adjusted wage for every year you worked.

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.

Read Also: Social Security Retirement Benefits Calculator

Social Security Benefits Could Increase More Than $150 A Month In 2023

Next year’s cost-of-living increase for Social Security benefits could be more than 9%, analysts predict.

Dan Avery

Writer

Dan is a writer on CNET’s How-To team. His byline has appeared in Newsweek, NBC News, The New York Times, Architectural Digest, The Daily Mail and elsewhere. He is a crossword junkie and is interested in the intersection of tech and marginalized communities.

The 2023 cost-of-living adjustment, or COLA, for Social Security benefits will be announced some time next month. Based on ongoing inflation, many analysts are predicting an increase approaching 10%, the biggest bump in more than 40 years.

This year’s increase was already a substantial 5.9% — equal to about $93 a month — which brought the average monthly check to $1,657. But, by June, the US Bureau of Labor Statistics announced that the Consumer Price Index, the year-over-year change in prices Americans pay for goods and services, was already up to 9.1%.

The CPI change was slightly lower in July but it still marked almost a year-and-a-half of consecutive inflation. Next year’s benefits increase “will be one of the highest COLAs ever paid in the history of the program,” Mary Johnson, a policy analyst at the nonprofit Senior Citizens League, told the Detroit Free Press.

How much will your Social Security check go up next year? Read on to find out.

For more on Social Security, learn when checks go out, how to access your benefits online and how benefits are calculated.

Do You Expect To Have Additional Sources Of Retirement Income Beyond Social Security

Social security retirement benefits calculator

Continue saving in the coming years.

Social Security won’t replace all of your pre-retirement income. On average, Social Security replaces 40 percent of a worker’s income. That means your retirement savings, pension, 401, or Individual Retirement Account will need to fill the gap. Claiming at your full Social Security benefit age or later can minimize this gap and maximize your monthly benefit. If you claim before your full retirement age, your monthly benefit could be reduced by as much as 30 percent.Learn more about saving for retirement.

You have an opportunity to continue growing your money.

If you can, get the highest monthly Social Security benefit possible by claiming at your full Social Security benefit age or later. If you claim before your full retirement age, your monthly benefit could be permanently reduced by as much as 30 percent. Also, take advantage of catch-up contributions to your 401 or Individual Retirement Account . Lastly, avoid losing your retirement savings to unnecessary tax penalties. If you withdraw your 401 or IRA savings before age 59½, you will likely face an early withdrawal penalty.Learn more about how retirement savings grow.

It’s a perfect time to start saving.

It’s never too late to start saving!

There are many ways to plan for a secure retirement outside of Social Security.

It’s never too late to start saving!

A type of retirement savings account offered by employers to help their employees save for retirement.

Also Check: What Is Social Security Disability Benefits

Are Social Security Benefits Taxable

If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits wonât be taxed at all. The amount of your benefits that is subject to taxes is calculated on a sliding scale based on your income. Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.

If your retirement income is high enough that your benefits are taxable, how do you pay those benefits? You can ask Social Security for an IRS Voluntary Withholding Request Form if youâd like the government to withhold taxes from your Social Security benefits. Otherwise, youâre expected to file quarterly tax returns to pay these taxes over the course of the year.

That covers federal income taxes. What about state income taxes? That depends. In 12 states, your Social Security benefits will be taxed as income, either in whole or in part the remaining states do not tax Social Security income.

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 who serves your area, try our free online matching tool.

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You Can Undo A Social Security Benefits Claiming Decision

There arent many times in life you can take a mulligan. But Social Security offers you the chance for a do-over. Lets say you claimed your benefit, but now regret the decision and wish you had waited. During the first 12 months of claiming benefits, you can withdraw your application. You will have to repay all of the benefits youve received, along with any spousal benefits, but when you restart benefits, youll receive a larger amount, just as you would have if you had delayed filing in the first place.

If it has been more than 12 months since you filed for Social Security, you cant withdraw your application and restart benefits at a later date. But early retirees who have returned to the workforce are not totally out of luck: Once you reach full retirement age, you can suspend benefits until age 70. This will enable you to earn delayed-retirement credits of 8% a year . This can add up to tens of thousands of dollars for many people, says William Meyer, chief executive of Social Security Solutions.

Calculating Your Actual Social Security Benefit

How Social Security benefits are calculated on a $40,000 salary

With the PIA, we can calculate your actual Social Security benefit. The other factor, besides the PIA, is your age when you begin receiving Social Security benefits, relative to your full retirement age, or FRA.

If you file for Social Security benefits to begin at exactly your FRA, your benefit will be the same as your PIA. For each month before your FRA, your Social Security benefit will be reduced from your PIA. Conversely, for each month after your FRA, up to age 70, your Social Security benefit will be increased from your PIA.

The early filing reductions are relative to your FRA. For each of the 36 months before your FRA, the PIA is reduced by 5/9 of 1%, or 0.556%. If you start benefits a full 36 months before FRA, the reduction amount is 20%.

For each month greater than 36 months before FRA, the PIA is reduced by an additional 5/12 of 1%, or 0.417%. So, for each full year greater than 36 months before FRA when you file, the additional reduction is 5%.

The delayed-filing increases are calculated as 2/3 of 1% for each month of delay in starting Social Security benefits after FRA. For each full year of delay, 8% is added to the PIA to calculate your Social Security benefit.

Your FRA is determined by your year of birth. If you were born between 1946 and 1954, your FRA is age 66. For each year after 1954, 2 months are added to the FRA. For birth years of 1960 or later, the FRA is age 67.

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