Apply The Social Security Benefits Formula
Once you know your AIME, you can plug it into the Social Security retirement benefits formula as outlined above. But remember to choose the correct formula for your age. You should use the one that was in effect in the year you turned 62 regardless of whether you signed up for benefits at that age.
The results you get from this step will give you your PIA. If you choose to sign up at your FRA, that’s also how much you’ll get for a benefit. But if you sign up before or after your FRA, there are a few extra steps to calculating your monthly benefit.
When Should I Start Collecting Social Security
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.
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.
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When To Apply For Benefits How Much Youll Get
AARP, Updated May 25 , 2022
All the information presented is for educational and resource purposes only. It is not intended to provide specific or investment advice. We don’t guarantee the accuracy of the tool and suggest that you consult with your advisor regarding your individual situation.
The Best Way To Avoid The Earnings Limit
The best way to avoid the earnings limit is to wait until you reach FRA to begin your benefits. Understandably, some people have no choice and must start benefits because they are laid off and they have no other income or assets. If this happens to you but your situation changes and you go back to work, you can withdraw your application for Social Security within 12 months of starting benefits.
Other people, however, do have a choice perhaps they could use some of their savings or retirement money to tide them over until they reach FRA. That may be a better option than starting Social Security early.
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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
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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Choose To Receive Social Security Benefits At Age 70
Social Security payments are available beginning at age 62. If you wish to receive the maximum benefits, hold off on receiving the benefits and opt to wait until age 70. You will get the largest possible monthly check.
Based on your birth year, if your full retirement age is 67 and you decide to collect your Social Security benefits at 62, your benefits will reduce by up to 30%.
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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.
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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Retiring Early Before 35 Years Of Work History
For those who dont even have 35 years of historical income, though, the effect of retiring early can be even more substantial. For instance, if the individual above had been aiming to retire even earlier, then the reality is that social security early retirement age 55 likely doesnt even have 35 years of earnings history. As a result, the additional projected years of working through full retirement age would both fill out the remainder of the highest 35 years, and replace lower earning years with new higher years. The exclusion of both if retirement occurs early can be substantial.
As the chart above shows, projected Social Security benefits would include 8 more years of $125,000/year earnings to complete the 35-year earnings history, and the subsequent 8 years would further increase AIME by overriding 8 early years that were at lower income levels. As a result, projected Social Security benefits would be $2,854.42/month based on an AIME of $9,885.71/month . However, if the individual actually retires at age 50, and simply locks in the benefits hes actually earned, the 35-year AIME would be only $8,220.24, and Social Security retirement benefits would actually be just $2,606.21/month, not $2,854.42 as projected with continued work!
How To Calculate Social Security Benefits In 3 Simple Steps
As you begin to plan for retirement, you must have a good estimate of your monthly retirement benefits from Social Security. This monthly benefit amount significantly influences your monthly budget and might determine whether you can retire now or need to keep working for a few more years. Many people ask, How is Social Security calculated? The calculation is somewhat complex, but we will walk you through the details of how to perform the calculation on your own. We will also point you toward an easy benefit calculator that takes out all the guesswork. Lets get started!
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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:
â¢ 90% of the first $996 of your AIME, plus
â¢ 32% of your AIME between $996 and $6,002, plus
â¢ 15% of your AIME over $6,002
For a worker with an AIME of $6,250, the calculation would look like this:
â¢ 90% of $966 = $896.40, plus
â¢ 32% of $5,006 = $1,601.92, rounded down to $1,601.90, plus
â¢ 15% of $248 = $37.20
This worker would earn a monthly Social Security benefit of $2,535.50 .
Do You Expect To Have Additional Sources Of Retirement Income Beyond Social Security
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.
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How To Use Credit Karmas Social Security Calculator
Every time you get paid, your employer is required to withhold a portion of your earnings to cover payroll taxes. Also known as FICA, or the Federal Insurance Contributions Act, this money is used in part to pay your Social Security taxes, which go toward funding retirement and disability benefits.
You wont be able to collect Social Security until youre retired, or have another qualifying circumstance, such as a disability.
How To Calculate Social Security Benefits
This article was written by Jennifer Mueller, JD. Jennifer Mueller is an in-house legal expert at wikiHow. Jennifer reviews, fact-checks, and evaluates wikiHow’s legal content to ensure thoroughness and accuracy. She received her JD from Indiana University Maurer School of Law in 2006.There are 10 references cited in this article, which can be found at the bottom of the page. This article has been viewed 70,220 times.
Understanding how much you’ll receive each month in Social Security benefits is a big part of retirement planning. The average is around $16,000 a year, but the actual amount you’ll receive depends on how much money you’ve put into the system. The Social Security Administration and other groups have online calculators that can help you estimate your benefits, but to calculate them more exactly you’ll have to calculate your average indexed monthly earnings to find your primary insurance amount. This amount must then be adjusted up or down to account for the age you decide to retire.XResearch source
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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.
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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Social Security Benefit Calculator
Social Security benefits can be an important factor to consider in your future retirement income. Use this calculator to estimate what your retirement benefit amount could be.
An Ameriprise advisor can look at your overall financial picture and provide personalized advice to help you meet your retirement income goals.
Why Did The Full Retirement Age Change
Full retirement age, also called “normal retirement age,” was 65 for many years. In 1983, Congress passed a law to gradually raise the age because people are living longer and are generally healthier in older age.
The law raised the full retirement age beginning with people born in 1938 or later. The retirement age gradually increases by a few months for every birth year, until it reaches 67 for people born in 1960 and later.
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.
When You Choose To Start Taking Social Security Benefits
The yearâand even the month within that yearâthat you choose to begin taking Social Security benefits affects how much you receive each month. You can start claiming Social Security benefits early as age 62, the current early retirement age. But you wonât get your full PIA. Itâll be reduced based on how many months you have until your full retirement age. This reduction can really add up, topping in at as high as 30% for particularly early claimers.
You can avoid these surcharges on your PIA, of course, simply by waiting to start payments until your full retirement age. This is generally between ages 66 and 67, depending on when you were born.
You can even add onto your base amount by delaying when you start benefits. After you reach full retirement age, you can boost your benefits by up to 8% of your PIA annually simply by not claiming Social Security. These benefit increases are known as delayed retirement credits, and you can accrue them up to age 70.
An important note: These benefit rate changes are performed to provide roughly the same cumulative benefit over a lifetime, assuming a roughly average lifespan. In other words, if you start Social Security earlier, youâll probably claim it for longer someone with the same lifespan who delayed payments would claim them for less time. To provide them the same total benefit, earlier payments must be smaller and later benefits have to be larger to catch up.
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