Wednesday, March 25, 2015

How Social Security benefits are calculated

Most American workers are entitled to receive a monthly Social Security retirement benefit by age 62. The average monthly Social Security check in 2015 is $1,328.  
But how does the government figure out how much each worker should receive?
The key to calculating someone’s Social Security benefit is to first figure out their Primary Insurance Amount (PIA).

The PIA is the baseline amount for your Social Security benefits. The amount of your benefit depends on many factors, including how long you worked, your income and how old you are when you retire.

To come up with each worker’s specific PIA, they start by figuring out how much you earned on average per month during your working years — called your Average Indexed Monthly Earnings (AIME) — and then use a formula to determine how much of that amount you'll get in retirement.
To get the AIME, the Social Security Administration looks back at all the years you worked up until the age of 60 and then adjusts your earnings to account for wage inflation over the years. Then, they zero in on your 35 highest-earning years and average them to get your AIME. Which works to your advantage — no one wants to have their benefit based on the few years they spent slumming it at a part-time job or the time they were laid off and weren’t earning anything for a while. Those super-low earnings would skew your results and drive your benefit down.

Before you get too excited, your AIME is NOT how much you can expect to get on a monthly basis in retirement. The SSA only gives you a fraction of your actual lifetime earnings. How big or small that fraction is depends on a formula the SSA uses:

You will receive 90% of the first $826 of your indexed monthly earnings (AIME).
For earnings between $826 and $4,980, you'll get 32% of your indexed monthly earnings.
Above $4,980, you'll get 15% of your indexed monthly earnings.
So, let’s say Joe Public had an AIME of $6,000 a month. He would receive 90% of his first $826 ($743); 32% of his next $4,154 ($4,980-$826=$4,154) indexed monthly earnings ($1,329); and 15% of the last $1,020 ($153) for a grand total monthly benefit of $2,225.

Timing is everything
If you were born between 1943 and 1954, your full retirement age is 66 (to figure out your full retirement age, check out this handy tool). If you retire exactly at the current full retirement age, you can expect to get exactly however much your PIA turned out to be.
But if you file for benefits early, your benefits will be reduced by 25% for the rest of your life.
If you wait to start taking benefits until after age 66, your benefits will increase by 8% for each year you wait until age 70. For example, if you start taking benefits at age 67, you would receive 108% of however much your PIA came out to. If you wait until age 68, you’ll get 116% and so on.

Don’t worry about the math
You can easily find your SSA monthly benefit without having to do the math yourself. Just head over to My Social Security, create an account and look up your Social Security statement. This statement gives a detailed snapshot of how much you can expect to earn in monthly benefits when you hit retirement age, plus your estimated disability and Medicare benefits. Everyone is entitled to get a paper statement mailed to them once every five years, but you can access it for free anytime online.

Do you rely on  your Social Security benefit as your primary source of income? We would love to hear from you: 

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