What Earnings Are Used To Calculate My Social Security Benefit
Ive been receiving lots of questions lately about how Social Security benefits are calculated. Its a great idea to have a full understanding of the factors involved to do the calculation, even if you dont actually do the math. Understanding the components of the overall equation may help you to identify ways to impact your benefit in a positive manner.
Recently a reader sent in the following question:
If my husband retires early at 62 and suspends his Social Security until his full retirement age, will his monthly benefit payments be determined by his last 35 years of working, or will it go back 35 years including the four years with no income which would make his benefits less?
Lets start this response with a clarification: Ill make the assumption that the reference to suspends his Social Security is actually indicating that he is delaying his application for Social Security benefits until his Full Retirement Age . This isnt much of a stretch, since technically Social Security retirement benefits cannot be suspended until after FRA.
The reader seems to have a misunderstanding of the use of 35 years worth of earnings in calculating the Social Security benefit. Its not the most recent 35 years worth of earnings, its the highest 35 years.
How Much Do You Lose If You Retire At 65 Instead Of 66
Age 65: 13.3 percent. Age 66: 6.7 percent.
Is it better to collect social security at 65 or 66? As you no doubt already know, most financial planners recommend that as long as you can afford it you should wait until you are 70 years old to start receiving your social benefits. Your monthly payment in such a case will be 32% higher than if you start receiving benefits at the age of 66.
These Four Factors Determine What Social Security Will Pay You
Before diving into what the program pays on average and by age, let’s first look at the primary factors that determine what you’ll be paid.
Though there are more than half a dozen factors that can affect your Social Security take-home pay, four stand out above all others. Two of the four — your work history and earnings history — are tied at the hip. The Social Security Administration takes your 35 highest-earning, inflation-adjusted years into account when calculating your monthly benefit at full retirement age. The more you earn up to the maximum taxable earnings cap in a given year, the more you’ll be paid during retirement. Just remember that for every year less of 35 worked, the SSA will average a $0 into your calculation.
The third significant payout determinant is your birth year. The year you’re born dictates the bend points for your primary insurance amount. It also determines your full retirement age — i.e., the age where you become eligible to receive 100% of your monthly benefit. The full retirement age for baby boomers ranges between 66 and 67, with anyone born in 1960 or later having a full retirement age of 67.
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What If I Delay Taking My Benefits
If you retire sometime between your full retirement age and age 70, you typically earn a “delayed retirement” credit for your own benefits . For example, say you were born in 1960, and your full retirement age is 67. If you start your benefits at age 69, you would receive a credit of 8% per year multiplied by two . This means your benefit would be 16% higher than the amount you would have received at age 67.
Policy Basics: Top Ten Facts About Social Security
Social Security provides a foundation of income on which workers can build to plan for their retirement. It also provides valuable social insurance protection to workers who become disabled and to families whose breadwinner dies.
Eighty-six years after President Franklin Roosevelt signed the Social Security Act on August 14, 1935, Social Security remains one of the nations most successful, effective, and popular programs.
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Example Of Maximum Social Security Benefits
Say that someone who turned 62 in 2021 will reach FRA at 66 years and 10 months, with earnings that make them eligible at that point for a monthly benefit of $1,000. Opting to receive benefits at age 62 will reduce their monthly benefit by 29.2%, to $708, to account for the longer time that they could receive benefits, according to the Social Security Administration . That decrease is usually permanent.
If that same person waits to get benefits until age 70, their monthly benefit increases to $1,253. The larger amount is due to the delayed retirement credits earned for the decision to postpone receiving benefits past FRA. In this example, that higher amount at age 70 is about 77% more than the benefit that they would receive each month if benefits started at age 62a difference of $545 each month.
Of course, the best time for someone to start taking Social Security benefits depends on a variety of factors, not just the dollar amount of the benefit. Things such as current income and employment status, other available retirement funds, and life expectancy also must be factored into the decision.
The SSA has calculators to help you estimate your benefits.
Average Social Security Check By Type
While most people think of Social Security as a program just for retirees, it serves many other groups, including the disabled, spouses and minor children of retirees as well as the spouses and minor children of deceased workers. The amount that each group receives differs substantially.
In fact, the average retired worker receives $1,669.44 each month about 8 percent more than Social Security recipients as a whole. Heres how the figures break down by recipient, as of June 2022.
|Type of beneficiary
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It’s A Good News/bad News Scenario For Beneficiaries
Considering that the coronavirus pandemic sent the prices of various goods and services screaming lower between March and May, it’s actually fantastic news that the nearly 65 million Social Security beneficiaries are receiving a COLA at all. A rebound in food inflation and healthy upticks in year-over-year prices for shelter and medical care services have ensured that benefits will move higher in 2021. That’s good news.
But a 1.3% COLA ties for the second-smallest positive increase since the CPI-W was tethered to the program in 1975. That’s problematic because inflation for shelter and healthcare costs — two of the most important expenditures for seniors — has been handily outpacing 1.3% on an annualized trailing-12-month basis. In other words, a 1.3% COLA simply isn’t going to cut it for retired workers, and their Social Security income is very likely to lose purchasing power once again.
Earlier this year, the nonpartisan senior advocacy group The Senior Citizens League released an analysis showing that the purchasing power of Social Security income had . That means what $100 in Social Security income used to be able to buy in 2000 can now only purchase $70 worth of identical goods and services. Inherent flaws with the CPI-W ensure that seniors are losing purchasing power on their Social Security income more years than not.
Benefits are going up across the board in 2021, but there’s simply not a lot to be excited about for Social Security recipients.
Calculating Social Security Payments
Benefits are based on your lifetime earnings. If you worked more than 35 years, Social Securitys formula will use the 35 years in which you earned the most, adjusted for wage inflation.
The average Social Security benefit for a retired worker in 2022 is $1,668.
The amount depends on how old you are when you decide to start drawing payments. You can start drawing benefits as early as age 62, but your payment will be reduced.
If you wait until full retirement age, which is between 65 and 67, depending on your birth year, you will receive your full benefit.
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Social Security limits the benefit amount. In 2022, the maximum check is $3,345 for a person who waited until full retirement age to start collecting payments.
If you were entitled to the maximum amount but started drawing benefits at 62, though, youd take a $1,000 haircut, and your monthly benefit would be just $2,364.
Full retirement age depends on when you were born. For people born 1960 or later, full retirement age is 67.
If you were born between 1943 and 1954, full retirement is 66. For people born between 1955 to 1960, the full retirement age increases by increments of two months per year until age 67. You can check your situation in Social Securitys full retirement age chart.
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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 $147,000 in 2022, up from $142,800 in 2021.
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.
Work Until Full Retirement Age
Another step you can take to maximize your Social Security benefits is to work until your full retirement age . Originally, this number was set at 65. But it has been steadily creeping up, thanks to the passage of the Social Security Amendments of 1983 . Starting in 2000, the full retirement age has been increasing in two-month increments so that its 67 for people born in 1960 or later.
If you dont wait till your FRA, the earliest you can start receiving Social Security is 62 years old. However, your benefit will be reduced by up to 30% if your FRA is 67 in this case.
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Social Security 202: How Much Will The Cola Increase Benefits For The Average Senior Couple
On Thursday, the Social Security Administration is set to announce the biggest cost-of-living adjustment to the program in four decades. According to advocacy group The Senior Citizens League, the increase could be as much as 8.7%, or roughly an extra $144 in monthly benefits for recipients and even more for couples where both individuals file.
As the Wall Street Journal reports, the Social Security Administration has adjusted benefit dollars on an annual basis since 1975, as a means to ensure the 70 million Americans who receive this income have enough supplementation to account for regular inflation. And with the surmounting rates of inflation in 2022, the SSA is projected to increase monthly payouts in these record numbers.
Per CBS, the last time the SSA gave as much of a COLA boost was in 1981 when there was an 11.2% increase. And the year prior, in 1980, there was an increase of 14.3%. Advocates have questioned whether the 2023 increase is good enough. As CBS notes, inflation reached a level of 9.1% in June, which is above the projected 8.7% COLA increase.
Though any increase in benefits is welcome news to many seniors and other Social Security beneficiaries who have been feeling budgets strapped due to increasing costs for food, gas and medical care. New payment amounts will be reflected starting with the January 2023 deposits.
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Social Security: What Is The Maximum Social Security Benefit You Can Receive In 2023
The 8.7% Social Security cost-of-living adjustment that goes into effect in 2023 will boost payments across the board for recipients including those who receive the maximum benefit this year.
The average Social Security benefit will rise by more than $140 a month, the Social Security Administration said in a press release last week. The increase will be about double that for beneficiaries at full retirement age who already get the maximum benefit.
The maximum Social Security benefit you can get depends on the age you retire. For example, if you retire at full retirement age in 2022, your maximum benefit would be $3,345 a month, according to the SSA. If you retire at age 62 in 2022, your maximum benefit would be $2,364 a month. If you retire at age 70 the latest age you can begin collecting Social Security your maximum benefit would be $4,194.
Those amounts will all move higher next year thanks to the biggest annual COLA in more than four decades. According to a Fact Sheet on the SSA website, the maximum Social Security benefit for someone retiring at full retirement age will rise to $3,627 a month in 2023 from $3,345 in 2022 an increase of $282.
The Supplemental Security Income federal payment standard will rise to $914 a month in 2023 from $841 in 2022 for individuals, and rise to $1,371 a month in 2023 from $1,261 a month in 2022 for couples.
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Earn More At Your Place Of Employment
Of course, you dont need this strategy to be your incentive for trying to increase your salary. But if you have some low-earning years in your 35-year work record , youll want to replace them with higher paying years. Or if you are thinking of working part time for several years, you may want to work full time for fewer years to have the higher income on your record.
How To Get The Maximum Social Security Benefit
Few people receive the maximum Social Security check from the government. To defy this and potentially become one of a small handful to bag $4,194 per month, you’ll need to be a high earner over many decades and delay receiving the benefits.
The checklist is as follows:
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You May Or May Not Like The Number You See
The upside of being married in retirement is having a partner to share experiences and expenses with. The downside, though, is having more expenses.
It costs more money to pay for food, healthcare, and other essentials for two people than one. But thankfully, senior couples typically receive more Social Security income than singles.
In 2022, the average individual monthly Social Security benefit will be $1,657. That number accounts for the 5.9% cost-of-living adjustment recipients are getting in the new year.
Meanwhile, the average senior couple on Social Security will be in line for $2,753 a month in benefits next year. And you may notice that that number is not twice as high as the average individual benefit.
Image source: Getty Images.
Why so? It’s often the case that within a given couple, there’s a higher earner and a lower earner. And that alone could explain why the average benefit for couples isn’t twice the average benefit for singles.
Also, many take advantage of spousal benefits in situations where one spouse never worked and therefore isn’t entitled to benefits based on his or her own work record. Those who are married and claiming spousal benefits can receive up to 50% of their spouse’s monthly Social Security paycheck, which also explains that lower benefit for couples.
What Is The Future Of Social Security
As of June 2022, the Social Security Trust Fund is projected to have enough resources to cover all promised benefits until 2035 when, absent a change from Congress, benefits would need to be cut for all current and future beneficiaries to about 80% of scheduled benefits.2 Over the longer term, changes to the full retirement age or means testingâwhich could reduce or eliminate benefits based on your other income sourcesâmay also be considered.
If you’re skeptical about the future of Social Security or wary of potential changes, you may be tempted to start benefits early, assuming that it’s better to have something than nothing. Regardless of your situation, if you are concerned about the future prospects for Social Security, then that’s a good reason to save moreâand earlierâfor your retirement.
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