How Are Social Security Retirement Benefits Calculated?

If you’re unsure about how much Social Security you’ll receive in retirement, you’re not alone.
When asked, many people admit they have no idea what their Social Security payments will be. While the exact calculation is an estimate, it can provide a clear idea of what to expect and help you plan better for your retirement years.

The Two Key Factors That Impact Your Benefit

Here’s how your Social Security benefits are determined. Your Social Security retirement benefit is primarily based on two things:

Your average lifetime earnings

The age at which you start collecting benefits

Let’s explore these in more detail. 

How Your Earnings History Shapes Your Benefit

Your Social Security benefit is calculated using your 35 highest-earning years of work where Social Security taxes were paid. The Social Security Administration (SSA) adjusts these earnings for inflation and uses them to calculate your average indexed monthly earnings (AIME).

In Simple terms - Social Security looks at the 35 years when you made the most money to figure out how much you’ll get in benefits when you retire. They don’t just take that amount as-is; they adjust that amount to calculate for inflation over time.

This method is designed to provide a fair representation of your lifetime contributions to the system.

To ensure your earnings record is accurate, you should review your history using your online My Social Security account.

How Age Impacts the Amount You’ll Receive

The age at which you choose to start collecting Social Security has a significant impact on your monthly payment:

Early Retirement (Age 62):

You can begin collecting as early as age 62, but this results in reduced monthly payments.

Full Retirement Age (66–67):

Waiting until your full retirement age means you’ll receive the standard benefit amount. For those born in 1960 or later, the full retirement age is 67.

Maximum Benefit (Age 70):

If you wait until age 70, your monthly payments will reach their highest possible amount. Keep in mind that benefits do not increase if you delay collecting past 70.

*One of the most frequently asked questions is,

"Should I wait to receive Social Security?"

In future articles, we’ll break down the cost and benefits of waiting to receive Social Security.

A Real-Life Example

Let’s say someone born in 1968 earned an average annual salary of $50,000. Here’s how their benefit might look depending on when they retire:

At Age 62:

They would receive about $1,410 per month.

At Age 67 (Full Retirement Age):

This amount increases to $2,014 per month.

At Age 70:

By delaying until 70, they would receive $2,497 per month, the maximum benefit based on these earnings.

A Critical Consideration for Pensioners

If you’re receiving a pension, it’s important to know you may not be eligible to collect 100% of your Social Security benefit. This is due to a rule called the Windfall Elimination Provision (WEP).

WEP reduces Social Security benefits for individuals who receive a pension from a job that did not withhold Social Security taxes.

Understanding how WEP applies to your situation can help you avoid surprises when planning your retirement income.

NUTS & BOLTS

How It Works

Using our tool is designed to be quick and insightful. Here’s what you can expect:

• Input Key Information: Provide details like your income, current expenses, retirement accounts, and general retirement age goal. This information helps us assess your current financial health and needs.
• Receive Your Personal Snapshot: With this input, we’ll generate an initial overview of your retirement readiness. This serves as a helpful guide, showing you where you stand and any adjustments that could help you reach your goals.
• Focus Your Strategy: Use these insights to shape your approach. Whether it’s saving more, recalculating your expenses, or rethinking your target retirement age, these personalized recommendations keep you informed and on track.