How Is Social Security Calculated?
There is a three-step process used to calculate the amount of Social Security benefits you will receive.
What is the formula for Social Security benefits?
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 this, the formula has what are called “bend points." These bend points are adjusted for inflation each year.
How to calculate Social Security if you are not 62?
Because of how the wage indexing formula works, if you are not yet age 62, your calculation to determine how much Social Security you will get is only an estimate. Until you know the average wages for the year you turn 60, there is no way to do an exact calculation. However, you could attribute an assumed inflation rate to average wages to estimate the average wages going forward, and use those to create an estimate.
How to calculate indexing year?
Your wages are indexed to the average wages for the year you turn 60. 4 For each year, you take the average wages of your indexing year (which is the year you turn 60) divided by average wages for the years you are indexing, and multiply your included earnings by this number. 5
What is wage indexing?
Social Security uses a process called wage indexing to determine how to adjust your earnings history for inflation. Each year, Social Security publishes the national average wages for the year. You can see this published list on the National Average Wage Index page. 3 .
What is the process used to determine how to adjust your earnings history for inflation?
Social Security uses a process called "wage indexing" to determine how to adjust your earnings history for inflation. Each year, Social Security publishes the national average wages for the year. You can see this published list on the National Average Wage Index page. 3
How to find average indexed monthly earnings?
Total the highest 35 years of indexed earnings, and divide this total by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.
How to calculate Social Security benefits?
Your Social Security benefit is based on your average indexed monthly earnings (AIME). You can calculate this by looking at your annual income each year. Make sure you only include the portion of your income that was subject to Social Security tax.
How much does Social Security pay?
Understanding how much you'll receive each month in Social Security benefits is a big part of retirement planning. The average is around $16,000 a year, but the actual amount you'll receive depends on how much money you've put into the system. The Social Security Administration (SSA) and other groups have online calculators that can help you estimate your benefits, but to calculate them more exactly you'll have to calculate your average indexed monthly earnings (AIME) to find your primary insurance amount. This amount must then be adjusted up or down to account for the age you decide to retire.
How to find out your NRA?
Find out your NRA by looking at the table on the SSA website, available at https://www.ssa.gov/oact/ProgData/nra.html. There is also a quick calculator on the side of the page. If you enter your birth date, it will tell you exactly when you will reach full retirement.
How much does the SSA withhold?
If you make more than $45,360 in 2018 after filing a claim for Social Security benefits, SSA withholds $1 in benefits for every $3 you earn in excess of this higher limit.
How many years do you have to work to get Social Security?
Add up your income for the 35 highest years. Social Security benefits are based on your average earnings for 35 years of work. If you haven't worked for at least 35 years, Social Security will average in zeroes for as many years as you are short. If you've worked more than 35 years, choose the 35 years in which you earned the most income.
How to find the average of 35 years?
Divide your total by 420. Once you've totaled your 35 highest-earning years, get the average by dividing that total amount by the number of months in 35 years, which is 420. Because you adjusted your earnings for inflation, this average is "indexed."
What is the maximum retirement benefit?
The maximum benefit depends on the year you retire, and how old you are when you retire. If you reach full retirement in 2017, your maximum benefit would be $2,687.
What is indexing factor for a prior year?
The indexing factor for a prior year Y is the result of dividing the average wage index for the year in which the person attains age 60 by the average wage index for year Y.
What is indexing factor?
Indexing brings nominal earnings up to near-current wage levels. For each case, the table shows columns of earnings before and after indexing. Between these columns is a column showing the indexing factors. A factor will always equal one for the year in which the person attains age 60 and all later years. The indexing factor for a prior year Y is the result of dividing the average wage index for the year in which the person attains age 60 by the average wage index for year Y. For example, the case-A indexing factor for 1982 is the average wage for 2020 ($55,628.60) divided by the average wage for 1982 ($14,531.34).
How much do retirees rely on Social Security?
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. 1. Although Social Security is only one part of a secure retirement plan, it's helpful to get a rough idea of how much you can expect. If you're eligible for Social Security, ...
What is the monthly benefit of Social Security?
If you're 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. Let's look at how each of these affects your future Social Security income.
When Will You Collect?
The SSA calculates your benefit amount at your full retirement age (FRA). This depends on the year you were born. FRA by birth year is:
What income reduces Social Security benefits?
If you start taking Social Security benefits before you reach full retirement age, any income you earn over the annual limit until you reach full retirement age will lower your benefit eligibility for that year. In 2021, if you are retired and haven't reached full retirement age, the SSA will deduct $1 from your benefits for every $2 earned over $18,960. In the year you reach full retirement age, the SSA will deduct $1 for every $3 earned over $50,520. 11 For the 2022 tax year, these thresholds are slightly higher, at $19,560 and $51,960, respectively. 5
How do I increase my Social Security benefits after retirement?
To increase your monthly benefit, don't start taking Social Security payments right when you reach full retirement age. The longer you wait, the more you'll get each month. If you want to get the highest possible amount of Social Security benefits each month, you need to wait until age 70 to retire. 12
How many credits do you need to qualify for spousal benefits?
2. You may be entitled to a spousal benefit because of your partner's work history. If your spouse, ex-spouse, or deceased spouse has earned 40 credits, you may qualify.
Is FRA a full benefit?
The monthly amount you are eligible to receive at your FRA is considered your full benefit, but it is not your minimum or maximum benefit .
How Does the Social Security Administration Calculate Benefits?
The Social Security Administration takes your highest-earning 35 years of covered wages and averages them, indexing for inflation. They give you a big fat “zero” for each year you don’t have earnings, so people who worked for fewer than 35 years may see lower benefits.
How long do you have to be a Social Security employee to get full benefits?
Anyone who pays into Social Security for at least 40 calendar quarters (10 years) is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born.
Who Is Eligible for Social Security Benefits?
Anyone who pays into Social Security for at least 40 calendar quarters (10 years) is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that - you can put it off as late as age 70 - you’ll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.
What is the Social Security income test for 2021?
For 2021, the Retirement Earnings Test Exempt Amount is $18,960/year ($1,580/month). If you’re in this age group and claiming benefits, then every $2 you make above the Exempt Amount will reduce by $1 the Social Security benefits you'll receive. (Note that only income from work counts for the Earnings Test, so income from capital gains and pensions won’t count against you.)
How does Social Security affect retirement?
Social Security benefits in retirement are impacted by three main criteria: the year you were born, the age you plan on electing (begin taking) benefits and your annual income in your working years. First we take your annual income and we adjust it by the Average Wage Index (AWI), to get your indexed earnings.
What age do you have to be to claim Social Security?
If you claim Social Security benefits early and then continue working, you’ll be subject to what’s called the Retirement Earnings Test. If you’re between age 62 and your full retirement age, and you’re claiming benefits, you need to know about the Earnings Test Exempt Amount, a threshold that changes yearly.
How many states tax Social Security?
That covers federal income taxes. What about state income taxes? That depends. In 13 states, your Social Security benefits will be taxed as income, either in whole or in part; the remaining states do not tax Social Security income.
How Social Security Works
Social Security works by collecting mandatory financial contributions from workers across the U.S.A. and distributes those contributions for people who are eligible for Social Security. A portion of your paycheck is taken out and given to Social Security each month.
When Can I Collect Social Security?
Once you have reached the age of 62 and are able to retire, you can begin collecting Social Security benefits. If you are disabled before the age of 62 you may be able to begin collecting Social Security benefits as well.
Social Security Calculator
Let’s look at just how much you can collect from Social Security when you become eligible for retirement benefits. Your base earnings are factored by your lifetime earnings. Depending on what year you began working, your maximum benefits are determined by an index factor that fluctuates depending on what year it is.
What is the retirement estimate?
The Retirement Estimator calculates a benefit amount for you based on your actual Social Security earnings record. Please keep in mind that these are just estimates.
Can you use the retirement estimate if you have blocked access to your personal information?
You cannot use the Retirement Estimator if you have blocked electronic access to your personal information.
Can you use the retirement estimate if you have enough Social Security?
You can use the Retirement Estimator if you have enough Social Security credits to qualify for benefits and you are not:
