Social Security retirement benefits are incredibly important sources of income for many Americans, so it’s vital to know some basic facts about the system to make sure you’re getting the full extent of benefits available.
The Social Security Administration calculates amount of your Social Security benefits, depending on your earning history, how long you’ve worked, inflation and the age at which you begin taking your benefits.
Social Security Retirement Benefit Calculation
The SSA totals the income you earned in the 35 years during which you earned your highest income, then divides that amount by 420 (the number of months in 35 years) to figure out your Average Indexed Monthly Earnings (AIME).
If you did not work for 35 years, the formula includes a zero in place of years you did not work. That would lower your average, so right here you can see that one way you can help maximize benefits is to work as many years as possible. This is true even past 35 years—particularly if there is a possibility that you will earn more in a new year, as opposed to a previous year (indexed for inflation).
The Social Security Administration figures out your Primary Insurance Amount (PIA). This is based on your AIME, in a process intended to skew benefits in favor of lower-income earners through the use of “bend points” that are also annually indexed for inflation.
To calculate your PIA, you apply the bend points for the year in which you turn 62. For example, if you begin benefits at your full retirement age (FRA), (based on your year of birth), you would total the following amounts to arrive at the amount you would receive:
• 90% of the first $895 of AIME
• 32% of the next $5397 of AIME
• 15% of any amount over that $5397
The Social Security Administration also adjusts your benefit for the amount at which you begin benefits.
The formula is difficult, but it is important to understand what goes into figuring out your benefits before you can start strategizing to maximize what is available to you.
In our next post, we will discuss how to get the most out of your benefits in more detail or visit WilsonMillerlaw.com