How Is Your Social Security Retirement Benefit Calculated

The Maximum Social Security Benefit For Newly Retired Workers In 2023

Each year, the formula used to calculate benefits for newly retired workers is adjusted to account for changes in general wage levels. That means the maximum benefit tends to increase from one year to the next. For instance, the maximum benefit for retired workers who claim Social Security at full retirement age is $3,627 in 2023, up 8.4% from $3,345 in 2022.

The chart below shows the maximum Social Security benefit payable to newly retired workers of different ages in 2023.

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As a caveat, beneficiaries must have 35 years of earnings that exceed the maximum amount subject to Social Security payroll tax — that figure is $160,200 in 2023 — to qualify for the maximum benefit. Only about 6% of the population actually reaches that threshold, so the vast majority of retired workers will receive a smaller Social Security check in 2023.

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.

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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How Your Benefits Are Calculated When You Work In Retirement

To see how your benefits are calculated when you continue to work in retirement, take a look at these examples provided by the Social Security Administration.

Example 1: You are under the full retirement age, are entitled to $9,600 in benefits for the year and you earn $29,560.

In this scenario, your earnings are $10,000 over the $19,560 limit for those under the full retirement age in 2022. Since the SSA reduces your benefits by $1 for every $2 you earn over the limit, your benefits would be reduced by $5,000, so instead of receiving $9,600 for the year, you would receive $4,600.

Example 2: You turned the full retirement age in August 2022 but worked the whole year, are entitled to $9,600 in benefits for the year , and you will earn $63,000 during the year, with $52,638 of it in the seven months from January through July.

From January through July, your benefits would have been reduced by $1 for every $3 over the limit. In this case, $52,638 is $678 over the $51,960 limit, so your benefits would be reduced by $226 for these seven months. Your total benefit for this time period would have been $5,600, so instead, you would receive $5,374. Starting in August, you would receive $800 per month, no matter how much you make for the rest of the year.

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Do You Plan To Continue Working In Your 60s

Working in your 60s will help you maximize your income and savings.

Your benefits are based on your highest 35 years of earnings. Each year of work can add higher earnings to your record by replacing years with low earnings such as those when you were a student, were unemployed, or took time off to care for someone. When you work and wait to claim until age 70, you can increase your monthly benefit by more than 75 percent! Working in your 60s also gives you more time to save on your own for retirement.Review your earnings record on my SocialSecurity.

Working in your 60s will help you maximize your income and savings.

Your benefits are based on your highest 35 years of earnings. Each year of work can add higher earnings to your record by replacing years with low earnings such as those when you were a student, were unemployed, or took time off to care for someone. When you work and wait to claim until age 70, you can increase your monthly benefit by more than 75 percent! Working in your 60s also gives you more time to save on your own for retirement.Review your earnings record on my SocialSecurity.

You can maximize your benefits even if you work fewer hours or stop working.

You can maximize your benefits even if you work fewer hours or stop working.

Consider working in your 60s for an extra boost to your income and savings.

Consider working extra years in your 60s for an extra boost to your income and savings

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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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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.

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Explore How The Age You Start Collecting Social Security Affects Your Retirement Benefits

The calculator bases your benefit estimate on current formulas from the Social Security Administration. Your answers are anonymous. Because we do not access or use your Social Security earnings record, these are rough estimates.

Your estimated benefits:

Select claiming ages on the graph to see how your estimated benefit changes.

Claiming at age Age 67 is your full benefit claiming age.

Compared to claiming at your full benefit claiming age.

Social Security retirement benefits are not designed to be your sole source of retirement income, but waiting even one month will increase your benefits.

Beware The Social Security Earnings Test

Bringing in too much money in earned income can cost you if you continue to work after claiming Social Security benefits early. With what is commonly known as the Social Security earnings test for annual income, you will forfeit $1 in benefits for every $2 you make over the earnings limit, which in 2022 is $19,560. Once you are past full retirement age, the earnings test no longer applies, and you can make as much money as you want with no impact on benefits.

Any Social Security benefits forfeited to the earnings test are not lost forever. At your full retirement age, the Social Security Administration will recalculate your benefits to take into account benefits lost to the test. For example, if you claim benefits at 62 and over the next four years lose one full years worth of benefits to the earnings test, at a full retirement age of 66 your benefits will be recomputed and increased as if you had taken benefits three years early, instead of four. That basically means the lifetime reduction in benefits would be 20% rather than 25%.

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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.

Myth #: Your Benefits Are Based Only On Wages Youve Earned Before Age 65

How your Social Security benefit is calculated can seem mysterious. However, its 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 dont 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 dont have 35 years with earnings, zeros will be included in the calculation.

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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:

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

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When youre years away from retirement, Social Security seems straightforward: Youll leave your job, file for benefits and receive a monthly check for the rest of your life boom! But in reality, getting the most out of Social Security is anything but simple. As you near retirement, the decisions you make could have a significant impact on the amount of money you receive, and some of these choices are irrevocable. Youll need to move carefully to maximize this income stream.

Here are 12 essential details you need to know.

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Working While Receiving The Cpp Retirement Pension

Youll qualify for a CPP Post-retirement benefit if you work while receiving your CPP retirement pension while under age 70 and decide to keep making contributions.

Each year you contribute to the CPP will result in an additional post retirement benefit and increase your retirement income. We will automatically pay you this benefit the following year. Youll receive it for the rest of your life.

You can choose to stop your post-retirement contributions when you reach age 65. Your contributions will stop when you reach age 70, even if youre still working. We will contact you if we need more information for you to qualify.

Contributions after age 65

If you work after you turn 65 and have not yet started to receive your CPP retirement pension, your earnings after age 65 may be used to replace any periods of low earnings before age 65, if it would be to your benefit to do so. This may increase your pension amount. Your contributions will stop when you reach age 70, even if youre still working.

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.

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How Are Spousal Benefits Calculated For Social Security For Married People

If someone is married to a worker eligible for Social Security benefits, they may be able to claim spousal benefits based on their worker spouses earnings. Social Security spousal benefits are based on the worker spouses earnings and the age of the claiming spouse. Note that spousal benefits do not in any way decrease your spouses retirement benefit.

To qualify for Social Security spousal benefits:

• Both the higher-earning worker and the claiming spouse must be at least 62
• The couple must have been married for at least one year
• The higher-earning worker spouse must already be receiving their earned benefit

Depending on the age that the spouse claims, the benefits can range between 32.5%-50% of the worker spouses primary insurance amount . As with earned benefits, youll receive less than the full spousal benefit if you decide to claim before your full retirement age. But unlike earned benefits, you dont receive more if you wait to claim spousal past full retirement age. In fact youll actually be forfeiting some money by waiting longer.

If only one spouse worked, then the Social Security Administration calculates half of the worker spouses PIA and adjusts it based on the age of the claiming spouse.