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How Are Social Security Benefits Calculated? Few Things & Factors Having Effect On The Benefits Among the most popular Social Security questions that I hear from baby boomers getting prepared for retire is "how are Social Security benefits calculated?" This is a critical question because it could affect how long you need to work, whether you need to continue to work during your retirement years, or any other factors of your retirement plan.
Firstly, please note that you get a Social Security retirement benefit estimate every year in the mail, generally near your birth date. There are also many calculators available on the Social Security web site to assist you estimate how much your retirement benefits will be, thus you do not require to know the methods to calculate the benefit yourself.
It is still useful to know how Social Security is calculated, however, so here are the fundamentals:
Mostly, your highest 35 years of earnings are listed for inflation, then averaged to figure out the base for your per month benefit. If you worked lower than 35 years, the missing years will be calculated as nothing for purposes of determining your benefit amount.
Planning tip: If you have near 35 years of earnings and you're near to retirement, you'll benefit significantly by continuing to work until you've 35 full years of earnings to include in your benefit calculation. Most of the people this will affect are ladies who took time off work to raise a family.
The highest 35 years of earnings are then divided by 35 to get your average indexed monthly earnings (AIME). A formula is applied to your Average indexed monthly earnings to figure out your primary insurance amount (PIA). We will not go into the details of the formula; the crucial thing to notice is that your PIA is the full unreduced benefit you'd receive if you retired at your full retirement age (at the age of 66 for people born between 1943-1954). This amount will be decreased if you take early retirement or increased if you retire after age 66.
The Primary insurance amount is also the base for many other benefits like spousal benefits, so it's crucial to understand that your Primary insurance amount isn't always the same amount that you'll receive. If you're married and your spouse will be collecting benefits according to your earnings rather than her own, then you may want to maximize your own Primary insurance amount to maximize the total Social Security benefits you & your spouse will obtain.
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