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Social Security Benefits Calculation Formula

Fact #: Social Security Provides A Foundation Of Retirement Protection For Nearly All People In The Us

How to Calculate Your Social Security Benefits

97% of older adults either receive Social Security or will receive it.

Almost all workers participate in Social Security by making payroll tax contributions, and almost all older adults receive Social Security benefits. In fact, 97 percent of older adults either receive Social Security or will receive it, according to Social Security Administration estimates.

The near universality of Social Security brings many important advantages. It provides a foundation of retirement protection for people at all earnings levels. It encourages private pensions and personal saving because it isnt means-tested it doesnt reduce or deny benefits to people whose income or assets exceed a certain level. Social Security provides a higher annual payout than private retirement annuities per dollar contributed because its risk pool is not limited to those who expect to live a long time, no funds leak out in lump-sum payments or bequests, and its administrative costs are much lower.

Universal participation and the absence of means-testing make Social Security very efficient to administer. Administrative costs amount to only 0.6 percent of annual benefits, far below the percentages for private retirement annuities. Means-testing Social Security would impose significant reporting and processing burdens on both recipients and administrators, undercutting many of those advantages while yielding little savings.

Social Security Calculation Step : Adjust All Earnings For Inflation

So lets jump in with calculating your AIME. To do this, youll need to get use a notepad or a tool like Excel/Google Sheets.

Youre going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.

The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says view earnings record. If you dont have an online account, its very easy to set one up.

This may seem a little redundant to put the year and your age, but itll make another step a little easier.

Now you just need to copy down the information from the SS earnings history. Youll want to use the part that says your taxed Social Security earnings. Dont skip a year, even if there were no earnings. Just put a zero in.

Once you have all of your historical earnings recorded, its time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.

Important note hereonly your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.

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.

Recommended Reading: Social Security Benefits And Early Retirement

How Much Social Security Will I Get If I Only Worked 10 Years

You need at least 10 years of work to qualify for Social Security retirementbenefits.

The Social Security Administration will calculate how much you will get in benefits based on your highest 35 years of earnings.

However, If you do not have 35 years of earnings by the time you apply for Social Security, your benefit amount will be lower than it would be if you worked 35 years.

In an example provided by AARP, a single person born in 1960 who has averaged a $50,000 salary, would get $1,349 a month by retiring at 62.

However, the same person would get $1,927 by waiting until age 67, the full retirement age.

Furthermore, he or she would get $2,389, the maximum benefit on those earnings, by waiting until age 70.

As mentioned earlier above, Social Security benefits do not increase if you wait to collect past age 70.

Understanding The Social Security Benefits Formula Is Important

More Nerdy Social Security Stuff I Found With My Spreadsheet

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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Recommended Reading: Social Security Ex Spousal Benefits Loophole

Factors That Affect How Much Youll Get In Retirement

Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the Investopedia Financial Review Board and the co-author of Investing to Win. Gordon is a Chartered Market Technician . He is also a member of CMT Association.

Most retirees rely on Social Security. One in four gets 90% of their retirement income from the program. About half rely on it for 50% of their income.

Although Social Security is only one part of a secure retirement plan, its helpful to get a rough idea of how much you can expect. If youre eligible for Social Security, your monthly benefit is based on two factors:

  • How much money you earned during your working career
  • The age you choose to start getting payments

Lets look at how each of these affects your future Social Security income.

Fraud In The Acquisition And Use Of Benefits

Given the vast size of the program, fraud sometimes occurs. The Social Security Administration has its own investigatory unit to combat and prevent fraud, the Cooperative Disability Investigations Unit . The Cooperative Disability Investigations Program continues to be one of the most successful initiatives, contributing to the integrity of SSA’s disability programs. In addition when investigating fraud in other SSA programs, the Social Security Administration may request investigatory assistance from other law enforcement agencies including the Office of the Inspector General as well as state and local authorities.

Also Check: Federal Government Employee Retirement Benefits

Office Of Hearings Operations

On August 8, 2017, Acting Commissioner Nancy A. Berryhill informed employees that the Office of Disability Adjudication and Review would be renamed to Office of Hearings Operations . The hearing offices had been known as “ODAR” since 2006, and the Office of Hearings and Appeals before that. OHO administers the ALJ hearings for the Social Security Administration. Administrative Law Judges conduct hearings and issue decisions. After an ALJ decision, the Appeals Council considers requests for review of ALJ decisions, and acts as the final level of administrative review for the Social Security Administration .

Do You Expect To Live A Long Life

Computation Years: Social Security Benefits Calculation

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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What Is Supplemental Security Income

SSI is a program administered by the Social Security Administration that provides monthly cash payments to low-income elderly or disabled individuals, including blind or disabled children. In addition, to be eligible for SSI the individual must have very few assets. For children on SSI, the Social Security Administration reduces the childs SSI benefit by two-thirds of the amount that is paid in child support.

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:

  • Visit a local Social Security office to get a record of your taxed Social Security earnings and an estimate of retirement benefits .
  • Visit the Social Security website and use one of its online benefit calculators to determine your retirement estimate based on your earnings record.
  • Wait until you decide to start receiving benefits, and let the SSA calculate the amount for you. However, this doesnt help you plan, and though the SSA can usually be counted on to determine benefits accurately, mistakes are sometimes made.
  • Calculate your own benefits using the step-by-step process described in this article. When you understand a few basic concepts, its not that difficult. One advantage of calculating your own benefits is that you can make decisions and consider trade-offs, such as whether you can afford to retire early or how much you can increase your benefits by continuing to work.
  • Read Also: Retirement Benefits For Federal Employees

    How To Create A My Social Security Account

    You can create your free My Social Security account at . You will need to:

    • Verify your identity by providing personal information and answering questions drawn from your credit report.

    • Create a username and password to access your account.

    • Confirm your email address and phone number.

    If you have a security freeze or fraud alert on your credit reports, you will need to temporarily lift it to create a My Social Security account. If you dont want to lift it, you can visit a local Social Security office to open the account in person.

    Read Also: Compute The Tax Free Portion Of Your Federal Retirement Benefit

    There’s More Bad News To Be Aware Of

    Will PERS Reduce My Social Security Benefits?

    Because COLAs are just put in place to allow seniors to keep buying the same basket of goods and services rather than to help them gain ground, seniors won’t end up with extra retirement benefits due to the 8.7% raise. At best, they’ll be able to maintain the same purchasing power they always had.

    The bigger problem, though, is that seniors typically have other income besides Social Security checks to help them cover their costs. Usually, this money comes from investments or savings. And surging inflation of the kind that led to the 8.7% COLA is not good for savers or for conservative investors .

    Seniors who have money in a savings account are going to get paid interest that’s below the rate of inflation. And since retirees can’t afford to take tons of risks with their investments, the return on investment their portfolios earn may also be well below the rate of inflation. So, their other income sources are losing ground thanks to the price increases that led to the big COLA.

    If you’re retired and you see that bigger check come in 2023, be sure to keep these factors in mind so you can be prepared for the reality of what your “extra” income will really buy.

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    Will Your Expenses Decrease After You Retire

    Retirement could be more expensive than you expect.

    If you’re planning an active retirement or carry a mortgage or other debt, retirement may be more expensive than you expect. Some regular expenses like your out-of-pocket health care costs will likely increase as you get older. You can protect your retirement lifestyle by reducing your largest expenses. You can also increase your regular income by claiming at your full Social Security benefit age or later. If you claim earlier, your monthly benefit could be reduced by as much as 30 percent.Create a retirement budget.

    Retirement could be more expensive than you expect.

    If you’re planning an active retirement or carry a mortgage or other debt, retirement may be more expensive than you expect. Some regular expenses like your out-of-pocket health care costs will likely increase as you get older. You can protect your retirement lifestyle by reducing your largest expenses. You can also increase your regular income by claiming at your full Social Security benefit age or later. If you claim earlier, your monthly benefit could be reduced by as much as 30 percent.Create a retirement budget.

    Maintain your lifestyle by planning ahead.

    Maintain your lifestyle by planning ahead.

    Many people find retirement is more expensive than expected.

    Many people find retirement is more expensive than expected.

    Fact #: Social Security Is More Than Just A Retirement Program It Also Provides Important Life Insurance And Disability Insurance Protection

    Over 65 million people, or more than 1 in every 6 U.S. residents, collected Social Security benefits in January 2022. While older adults make up about 4 in 5 beneficiaries, another one-fifth of beneficiaries received Social Security Disability Insurance or were young survivors of deceased workers.

    In addition to Social Securitys retirement benefits, workers earn life insurance and SSDI protection by making Social Security payroll tax contributions:

    • About 96 percent of people aged 20-49 who worked in jobs covered by Social Security in 2020 have earned life insurance protection through Social Security.
    • For a young worker with average earnings, a spouse, and two children, thats equivalent to a life insurance policy with a face value of nearly $800,000 in 2020, according to Social Securitys actuaries.
    • About 89 percent of people aged 21-64 who worked in covered employment in 2020 are insured through Social Security in case of severe disability.

    The risk of disability or premature death is greater than many people realize. Some 7 percent of recent entrants to the labor force will die before reaching the full retirement age, and many more will become disabled.

    Recommended Reading: Social Security Benefits Eligibility Age

    How Social Security Benefits Are Calculated

    Qualifying for Social Security in the first place requires 40 work credits or approximately 10 years of work. To be eligible to receive the maximum benefit, you need to earn Social Securitys maximum taxable income for 35 years. The cap, which is the amount of earnings subject to Social Security tax, is $160,200 in 2023, up from $147,000 in 2022.

    Social Security benefits are calculated by combining your 35 highest-paid years . First, all wages are indexed to account for inflation. Wages from previous years are multiplied by a factor based on the years when they were earned. This calculation gives an amount comparable to buying power based on the current value of the dollar. Accounting for this valuation change is important because a salary of $14,000, for example, was far more impressive in 1954 than it is today.

    Once all wages have been indexed, your average indexed monthly earnings is computed by dividing the sum of all indexed wages by 420 . If you worked fewer than 35 years, a zero is entered for years when you did not work. The benefit amount is then calculated based on factors that include the year when collection begins, whether you have reached FRA, and whether you continue to work while collecting benefits.

    Once you reach age 70, there is no reason to wait longer to start collectingyour benefit wont increase further.

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