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.
Technically, your PIA is calculated and rounded to the next lowest dime, and then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Next, any increase or decrease based on age is applied. That number is then rounded down to the next lowest dollar.
You can see current and historical bend points and the current year’s bend points on the Bend Formula Bend Points page of the Social Security Administration’s website.
In the example in the table below, you can see how the AIME calculated in the previous step was plugged into the bend point formula to calculate the PIA.
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 |
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| Age |
Average Retirement Income From Work:
Work after retirement is becoming an important part of retirement income.
Before the pandemic, the Bureau of Labor Statistics reported that increasing numbers of people over 65 and even over 75 would be remaining in the work force. And, a report from the Transamerica Center for Retirement Studies study found that more than half of workers plan to work in retirement, either on a full-time or part-time basis.
And, 81% of those boomers cite financial reasons the need for retirement income for continuing to work.
However, this research contradicts the headlines reporting on the great resignation, massive numbers of people retiring. And, in fact, Pew Research reports that half of everyone over 55 is now out of the labor force due to retirement.
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List Each Year’s Earnings
Your earnings history is shown on your Social Security statement, which you can now obtain online.
In the table below, sample earnings for a hypothetical worker born in 1953 are shown in Column C. Only earnings below a specified annual limit are included. This annual limit of included wages is called the “Contribution and Benefit Base” and is shown as Max Earnings in Column H in the table.
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 Are Social Security Benefit Payments Calculated
Keep in mind that Social Security payments are calculated using the 35 highest-earning years of your career, U.S. News reported. If you work for more than 35 years, your lowest-earning years are dropped from the calculation, boosting your payment. Those who dont work for 35 years have zeros averaged into the calculation and receive lower payments.
The AARP provides the following example on its website: Suppose you were born on Jan. 1, 1960, and had an average annual income of $50,000. As of June 2022, you would would get a monthly benefit of $1,338 if you file for Social Security at 62 $1,911 at full retirement age or $2,370 at 70.
Another thing to keep in mind: Social Security sets a cap on how much of your income it takes into account when figuring your benefit. In 2022 the cap is $147,000 a year, though that figure changes annually to account for wage trends. Any income above that is not counted in your benefit calculation, but is also not subject to Social Security taxes.
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Social Security Benefits In The United States Are Lower Than In Many Other Developed Countries
Governments around the world are feeling fiscal pressure, and some have adopted austerity programs that trim retirement benefits. This has prompted some commentators to ask why the United States should be different. But that question ignores the fact that most other developed countries have more generous public pension systems than the United States.
The Organisation for Economic Co-operation and Development has tallied the percentage of past earnings that the public pension system replaces for various countries. By that measure, the United States ranks in the bottom third among major developed nations. The average OECD nation has a public pension program that replaces half of earnings for an average worker the U.S. system replaces about 40 percent of earnings.
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Retirement Income Strategy: Create Buckets
One of the most popular strategies for retirement income planning is to formulate a bucket approach. A bucket approach, also sometimes called a time segmentation strategy, establishes different buckets or accounts for different spending in different time periods.
Money you need in the short term would be held in cash. Money you need a long time from now could be invested in higher risk, higher return opportunities.
For example,
- Near Term Monetary Needs: Two to five years of income would be in cash or cash equivalents.
- Mid Term Income: Your second bucket might have a more mixed investment allocation in things like bonds and CDs or mutual funds. These types of investments can provide some growth.
- Long Term: Bucket three can be more heavily invested in stocks as the retiree wont have to touch that bucket for at least 10 years.
We recommend the bucket approach, says Kathleen Fish, founder of Fish and Associates, a financial services firm based in Memphis, Tennessee. There, we look at all income sources and put our clients investments into buckets representing different risk levels.
Fish continues, This strategy helps to keep people invested, because they can see their required income is set aside and is not impacted by the fluctuations in the stock market.
Applying Social Security Bend Points To Convert Aime To The Primary Insurance Amount
While the AIME determines the amount of average lifetime earnings that will be used to calculate a Social Security benefit, the actual benefit calculation still requires applying the income replacement factors.
With pensions, it was/is typical to use a single replacement percentage tied to years of work. For instance, a workers pension income might be 2% of final wages for each year worked, which means someone with 35 years of working history will receive a 35 years x 2%/year = 70% replacement rate. With Social Security, however, there are 3 replacement rate tiers, and theyre based not on the number of years worked, but on the workers average earnings in the first place .
Specifically, Social Security is calculated by replacing 90% of the first $856/month of AIME, plus 32% of the next $4,301/month of AIME , plus 15% of any remaining income above $5,157/month of AIME. The last 15% tier applies up to the maximum amount of earnings that can ever be considered for Social Security, which in 2016 is $9,875/month .
For someone who earns the maximum income eligible for Social Security throughout their working career, the maximum Social Security benefit is $2,639/month in 2016.
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Retirement Income Strategies And Planning: Get A Real Plan And Keep It Updated
One of the best and easiest steps you can take to figuring out retirement income is to create a detailed retirement plan. You need to really dig into the details of your own financial situation and see how well that mixes with your hopes for the future.
You probably have significant retirement income from Social Security. The trick is to calculate out how much more you might be spending every month and figuring out a reliable income plan for that difference.
A simple five question retirement calculator wont do this for you, but there are some sophisticated tools available online.
The NewRetirement Retirement Planner is widely considered the best online tool. It is highly detailed and easy to use, best of all it saves your information so you can quickly make adjustments as your finances and plans evolve.
And, once you have set up a baseline plan you can try any of the scenarios described above and assess whether or not its really a good idea for your future.
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.
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Retirement Income For 2022 Is Only Part Of The Equation
Knowing about average retirement income for 2022 is interesting and one way to benchmark your financial health.
However, knowing your own projected retirement income from now throughout retirement and also calculating your future spending is the key to a secure retirement.
The NewRetirement Retirement Planner isnt a magic 8-ball , but it can give you very personalized and detailed answers and forecasts for your retirement income and spending.
Average The Highest 35 Years
The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.
Total the highest 35 years of indexed earnings, and divide that amount by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.
For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total $1,919,040. Divide by 420 to get an AIME of $4,569.
| How to Calculate Your AIME for Social Security Benefits |
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Go The Annuity Route To Avoid Unpredictability
Most retirement income plans are unpredictable. You dont know how long you will live and if the money will last. You dont know if stocks will go up or down. You cant be sure if dividends will get cut or if interest rates will go up or down well, at this point, interest rates can pretty much only go up.
Anyway, if you are concerned about unpredictability, then a lifetime annuity with inflation protection and spousal support might be the way to go.
And, you can now get pretty sophisticated with annuities. In years past, the alternative to riding out a bumpy stock market while trying to create a steady retirement income was to take the money out of the market and put it into an immediate annuity, notes Sean Clark, principal with York Independents, in York, Pennsylvania.
Clarke says there is a different method available for middle class investors today, and is a solution that he uses with great frequency. The solution is an equity indexed annuity with a lifetime income benefit rider, he explains.
This account functions similarly to any other type of investment or deposit account, in which the investor retains full control over the investment, but it also provides for an income guaranteed by the annuity company to last at least as long as the client does. This eliminates longevity risk for the client, and creates a level of confidence in their ability to retire which is unavailable in mostly any other investment.
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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Calculating Average Indexed Monthly Earnings
The caveat to calculating an average of a workers highest 35 years of historical earnings is that in the distant past, earnings were typically lower not just because the worker might have been earlier in his/her career, but simply because inflation lifts average wages over time . For instance, the chart below is an example of one worker’s hypothetical historical earnings, with a high point in the early years but in general a slow upward trend to earnings over time.
Accordingly, when Social Security determines the 35-year average of earnings, it first inflation-adjusts those earnings into current dollars using the National Average Wage Index. Technically, this is done by inflation-indexing all historical earnings into a base year that was 2 years before the individual turned 62 and first became eligible for benefits. Thus, a 62-year-old in 2016 will have historical earnings inflation-adjusted to the 2014 wage index in general, Social Security benefits are indexed to wage levels 2 years before becoming eligible at age 62, which means indexed to the individuals age 60. This ensures that benefits based on historical average wage calculation isnt indirectly reduced simply due to the fact that wage inflation hadnt yet occurred in the past.
Once inflation-adjusted earnings have been calculated throughout all the working years, its possible to determine which were the highest 35 years of earnings that will be included in the Social Security benefits calculation .