Many people wonder how the Social Security Administration (SSA) calculates their Social Security retirement benefit. They base these benefits on your lifetime earnings, adjusting—or “indexing” your actual earnings to account for changes in average wages since the year the earnings were obtained.
Then, the administration calculates your average indexed monthly earnings during the 35-year-stretch in which you earned the most, applying a formula to these earnings and determining your basic benefit, also known as a “primary insurance amount.” This means how much you would receive at your full retirement age, 65 or older, depending on your birthday.
Factors that can change the amount of your retirement benefit include:
- You decide to obtain benefits prior to your full retirement age
- You’re eligible for cost-of-living benefit increases starting with the year you turn 62 years old
- You delay your retirement past your full retirement age
- You’re a government worker with a pension
Step-by-Step Process to Calculating Your Social Security Benefits
If you qualify for Social Security benefits, you can arrive at a reasonable estimate for these benefits by completing the five following steps:
- Total earnings – The SSA determines the total amount you earned in the 35 years during which you made the most money, up to the maximum amount per year. The limit is adjusted according to inflation. If you worked fewer than 35 years, the missing years are considered as zero years. For instance, if you worked a total of 25 years, the SSA would add up your income for all 25 years you worked (adjusting for inflation) and then factor 10 years of zero pay.
- Average indexed monthly earnings (AIME) – The resulting sum from Step 1 is divided by 420 months (35 years) and rounded down to the nearest dollar to calculate your AIME.
- Benefit at full retirement age (the age at which you can take full benefits) – Your benefit depends on a three-tiered percentage of your AIME. Keep in mind, the formula is based on the year when you first became eligible for Social Security. For instance, for those who first become eligible in 2017, the benefit is calculated as (90% of your first $885 of AIME) + (32% of AIME above $885 and through $5,336) + (15% of AIME above $5,336). The sum is your estimated monthly retirement at your full retirement benefit.
- Benefit if you retire early – If you wish to retire earlier than anticipated and obtain benefits prior to your full retirement age, then your monthly benefit will be reduced. For example, if your full retirement age is 66 and you want to retire by the age of 62, then multiply the result from Step 3 by 75%.
- Reductions for earned income while receiving benefits – If you are under your full retirement age and working, you can still receive early benefits. Keep in mind, for every $2 you earn above the annual limit, your benefits will be reduced by $1. In the year you reach full retirement age, before the month in which you reach that age, you can earn up to a specific limit before the SSA deducts $1 for every $3 you earn.