# How to Calculate Social Security Benefits: A Step-by-Step Guide

A hands-on guide to running the numbers behind your Social Security

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A complex formula determines how your Social Security benefits are calculated. The following factors go into the formula:

• How long you work
• How much you make each year
• Inflation
• At what age you begin taking your benefits

Take a look at how these factors affect the benefits you will receive and how the Social Security Administration calculates its figures.

### Key Takeaways

• Your Social Security benefit is decided based on your lifetime earnings and the age when you retire and begin taking payments.
• Your lifetime earnings are converted to a monthly average based on the 35 years in which you earned the most, adjusted for inflation.
• Those earnings are converted to a monthly insurance payment based on your full retirement age.
• Your monthly payment will decrease or increase if you retire earlier or later than your full retirement age.

## How Is Social Security Calculated?

There is a three-step process used to calculate the amount of Social Security benefits you will receive.

Step 1: Use your earnings history to calculate your Average Indexed Monthly Earnings (AIME).
Step 2: Use your AIME to calculate your primary insurance amount (PIA).
Step 3: Use your PIA, and adjust it for the age when you will begin receiving benefits.

You can use a copy of your Social Security statement that provides your earnings history to plug your own numbers into the formulas below.

## Step 1: Calculate Your Monthly Earnings

Your Social Security benefit calculation starts by looking at how long you worked and how much you made each year. It is used to calculate your AIME. Here's how to find it.

### List Each Year's Earnings

Your earnings history is shown on your Social Security statement, which you can now obtain online.

In the table below, sample earnings for a hypothetical worker born in 1953 are shown in Column C. Only earnings below a specified annual limit are included. This annual limit of included wages is called the "Contribution and Benefit Base" and is shown as Max Earnings in Column H in the table.

### Adjust 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.

Your wages are indexed to the average wages for the year you turn 60. 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 that number.

Example:

• In the table below, see actual wages of \$21,000 for 1984 in Column C.
• In column D are the average wages according to the National Wage Index.
• Take \$44,888.16, which is the average income for the year this person turned 60 (2013), divided by \$16,135, to get the Index Factor you see in Column E.
• Multiply 1984's earnings by this index factor to get \$58,423, which you see in Column F.

### Note

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.

### Average the Highest 35 Years

The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.

Total the highest 35 years of indexed earnings, and divide that amount by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.

For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total \$1,919,040. Divide by 420 to get an AIME of \$4,569.

## Step 2: Calculate Your Primary Insurance Amount (PIA)

Once you have calculated your average indexed monthly earnings (AIME), you'll plug that number into a formula to determine your primary insurance amount, or PIA. This formula is based on something called "bend points."

### Social Security Bend Points

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 that, the formula uses what are called “bend points," which are adjusted for inflation each year.

Bend points from the year you turn 62 are used to calculate your Social Security retirement benefits. The example in the table below uses 2020 bend points. It works like this:

• You take 90% of the first \$960 of AIME.
• You take 32% of the next \$5,785 of AIME.
• You take 15% of any amount over that \$5,785.
• You total those three numbers.

The result is your primary insurance amount, or PIA, the amount you will receive if you begin benefits at your Full Retirement Age (FRA).

Your PIA is rounded to the next lowest dime, and your benefit amount is rounded to the next lowest dollar.

### Note

Technically, your PIA is calculated and rounded to the next lowest dime, and then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Next, any increase or decrease based on age is applied. That number is then rounded down to the next lowest dollar.

You can see current and historical bend points and the current year's bend points on the Bend Formula Bend Points page of the Social Security Administration's website.

If you are not yet 62, your benefit calculation is only an approximation, as you do not yet know what the final bend point amounts for the year you turn 62 will be. You can use an estimated inflation rate to approximate future years' bend points to develop a pretty accurate approximation.

In the example in the table below, you can see how the AIME calculated in the previous step was plugged into the bend point formula to calculate the PIA.

### Can Your PIA Change After You Reach Age 62?

There are two things that affect your PIA after you reach age 62:

1. Higher earnings: Earnings in years between age 62 and 70 that are higher than one of the 35 highest earnings years previously used in the formula will change your AIME, which is used in the PIA formula.
2. Inflation: Your PIA will be adjusted by the same cost-of-living adjustments applied to people who are already receiving Social Security benefits. You can see historical cost-of-living adjustment rates on the Social Security Administration's website.

### Note

You may get the wrong answer when running your own calculations on when to begin Social Security if you simply take the numbers off your statement and do not properly apply inflation adjustments.

## Step 3: Adjust Your PIA for the Age You Will Begin Benefits

The final amount of Social Security retirement benefit that you receive is based on the age when you begin benefits.

The earliest you can begin retirement benefits is age 62 (age 60 if you are eligible for a widow or widower's benefit on a deceased spouse's or ex-spouse's record). You will get more by waiting until a later age—as late as age 70—to begin receiving benefits.

Of course, another complex formula is used to determine how much more you will receive if you wait.

This formula uses your Primary Insurance Amount (PIA) calculated in the previous step. This is the amount you will get if you start benefits at your full retirement age (FRA). Your FRA can vary, depending on the year you were born. For people born between 1943 and 1954, as in our example, the FRA is age 66.

### Note

For people born on January 1, the FRA is based on the year prior. Someone born on January 1, 1955, will have an FRA based on 1954.

A reduction is applied to your PIA if you begin benefits before your FRA. A credit, referred to as a "delayed retirement credit," is applied if you begin to receive benefits after your FRA.

### Beginning Benefits Before FRA

If you choose to begin to receive benefits before you reach your full retirement age, one or both of the following calculations will apply:

• 5/9 of 1%: Your benefits are reduced by 5/9 of 1% per month, up to a maximum of 36 months, depending on how many months you have until you reach FRA.
• 5/12 of 1%: If you are more than 36 months away from reaching FRA, the reduction above is applied, and then for the number of months greater than 36, the benefit is further reduced by 5/12 of 1% per month.

Therefore, if your FRA is age 66, your benefits would be reduced by 25% if you begin taking them at age 62. Find that figure by taking 5/9 of 1%, or 0.56; multiply by 36 months to get 20%. Then, 5/12, or 0.42, multiplied by the remaining 12 months, is 5% for a total of 25%.

### Credit for Taking Benefits Later Than FRA

If you were born in 1943 or later, your benefits will increase by 2/3 of 1% per month, or 8% per year, for each month that you are past your FRA when you begin to receive benefits. Survivor benefits for a widow or widower will also receive these delayed retirement credits.

Therefore, If your FRA is 66, your benefits would be increased by 32% by waiting until age 70 to begin (8% per year times four years).

## How Inflation Impacts Your PIA

Your PIA is calculated at age 62. If you wait beyond age 62, cost-of-living adjustments (COLAs) will be applied to your PIA for each year afterward.

If you have already had most of your 35 years of earnings, and you are near age 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cost-of-living adjustments. Many people do not account for this when doing their own calculations, which can lead them to think that taking Social Security early is a better deal, when waiting is often the better deal.

In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits.

## How Do You Calculate Your Social Security Taxes?

"Social Security taxes" can refer to taxes paid into the Social Security system or taxes paid on Social Security benefits. The taxes that fund Social Security come from the payroll tax, which is 6.2% for employees or 12.4% for self-employed individuals.

When you're receiving Social Security benefits, you'll still have to pay income taxes, but you won't owe taxes on all of your benefits. Those whose total annual income tops \$34,000 (\$44,000 for those filing joint returns) will pay income tax up to 85% of their Social Security benefits. Otherwise, incomes between \$25,000 to \$34,000 may have to pay income tax on up 50% of their Social Security benefits.

## How Do You Calculate Spousal Social Security Benefits?

Spouses who do not meet earnings requirements may receive up to 50% of their partner's PIA, but claiming benefits before reaching full retirement age can reduce this amount.

## When Will I Receive My Social Security Check?

The Social Security Administration's payment calendar helps recipients plan for payments. If you were born in the first 10 days of your birth month, then you receive payments by the second Wednesday of the month. Those born on the 11th-20th receive payments by the third Wednesday. Those born from the 21st-31st receive payments by the fourth Wednesday. However, those who began receiving payments before May 1997 receive payments by the third day of each month.

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Sources
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1. Social Security Administration. “Social Security Benefit Amounts.”

2. Social Security Administration. “Frequently Asked Questions.”

3. Social Security Administration. “Average Wage Indexing (AWI) Series.”

4. Social Security Administration. “Indexing Factors for Earnings.”

5. Social Security Administration. “Social Security Benefit Amounts.”

6. Social Security Administration. “Distributional Effects of Increasing the Benefit Computation Period.”

7. Social Security Administration. “Benefit Formula Bend Points.”

8. Social Security Administration. “Primary Insurance Amount.”

9. Social Security Administration. “Cost-of-Living Adjustment (COLA) Information.”

10. Social Security Administration. “Benefits Planner: Survivors | If You Are the Survivor.”

11. Social Security Administration. “How Delayed Retirement Affects Your Social Security Benefits.”

12. Social Security Administration. "Full Retirement and Age 62 Benefit By Year Of Birth."

13. Social Security Online. “Early or Late Retirement?

14. Social Security Administration. “Benefits by Year of Birth.”

15. Social Security Administration. "Increase for Delayed Retirement."

16. Social Security Administration. “Old Age and Survivor's Insurance.”

17. Social Security Administration. ”Application of COLA to a Retirement Benefit.“

18. Social Security Administration. “Latest Cost-of-Living Adjustment.”

19. Social Security Administration. "Fact Sheet: 2022 Social Security Changes."

20. Social Security Administration. "Income Taxes And Your Social Security Benefit."

21. Social Security Administration. "Benefits for Spouses."

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