How Are Social Security Benefits Calculated? Some Points & Aspects Having Effect On The Benefits

One of the most popular Social Security questions that I hear from baby boomers getting ready to retire is "how are Social Security benefits calculated?" This is a crucial question since 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.

First, please note that you get a Social Security retirement benefit estimate each year in the mail, usually near your birth date. There're also several calculators available on the Social Security site to assist you estimate how much your retirement benefits will be, thus you don't require to know how to calculate the benefit yourself.

It's still advantageous to know how Social Security is calculated, but, so here are the basics:

Generally, your highest 35 years of earnings are listed for inflation, then averaged to determine the base for your monthly benefit. If you worked less than 35 years, the missing years will be calculated as nothing for purposes of determining your benefit amount.

Planning suggestion: If you have near 35 years of earnings and you're near to retirement, you will benefit significantly by continuing to work until you have 35 full years of earnings to include in your benefit calculation. The majority of people it'll affect are women 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 determine your primary insurance amount (PIA). We will not go into the specifics of the formula; the important thing to notice is that your Primary insurance amount 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 reduced if you take early retirement or increased if you retire after age 66.

The Primary insurance amount is also the basis for other benefits like spousal benefits, thus it's critical to understand that your Primary insurance amount isn't necessarily the same amount that you'll receive. If you are married and your spouse will be collecting benefits based on your earnings rather than her own, then you might want to maximize your own Primary insurance amount to maximize the total Social Security benefits you & your spouse will obtain.

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