How To Calculate Social Security Benefits: 4 Easy Steps

Step-By-Step Video Guide

It’s important for you to understand how to calculate Social Security benefits. Sure, the Administration will perform this calculation for you, but if you understand the process used you may be able to spot errors and fix mistakes before it’s too late.

Here’s how to calculate your benefit amount in 4 easy steps.

Transcript of video is below:

Hello Everyone! This is Devin Carroll with Social Security

Most of the programs administered by the federal government, have really complicated rules. That’s can certainly seem to be the case when you’re trying to figure out how Social Security benefits are calculated.

Before I understood these rules, I struggled to understand how the Social Security Administration determined who would get what benefit amount.  But once I distilled the several pages of calculation rules, I realized that there are only four simple steps.

I think it’s important that you understand the Social Security benefits calculation. If you do, not only will you be in a better position to plan, but you may be able to spot mistakes and fix them before it’s too late.

Let’s get started with the first step.

In the first step, which generally occurs at age 60, all of your prior earnings are adjusted for inflation.  This adjustment is simply meant to ensure your Social Security benefit reflects today’s cost of living. (If your benefit was based on your actual non-inflation adjusted earnings, it would be much lower.)

Let me give you an example…

Let’s assume that an individual began work in 1976 at the age of 25. His earnings that year were $15,000.

Throughout the course of his career, he averaged a 3% increase to his annual salary. By the time he retired at age 66, his salary was $50,398. These are the earnings amounts that the Social Security Administration uses in their benefits calculation. But they don’t use these earnings at their face value. Instead, they take all earnings up to age 60 and adjust them for inflation.

This inflation adjustment is simply meant to ensure your Social Security benefit is reflective of todays cost of living and not the cost of living from 1976! There’s a table on the Social Security’s website that show exactly what the multiplier is for every year going back several decades.

Using those actual numbers from the social security website, this individual would have see his 1976 earnings indexed up to more than $66,000.

You’ll notice that almost every year gets indexed upward for inflation. You’ll also notice that earnings after age 60 do not get indexed…

But instead are used at face value.

So it’s not actual earnings, but it’s these adjusted earnings that are used in the first step of the benefits calculation.

Once all the earnings are indexed for todays cost of living it’s time for step 2.

Determining the Average Indexed Monthly Earnings (often referred to on the Social Security website as AIME).

The AIME is simply the average of your monthly inflation adjusted earnings while you were working….with one caveat. They only use 35 years of earnings. Thankfully, they’ll take the highest 35 years of indexed earnings.

In this example, there was 40 years of earnings so the years in red would not be used as they are the lowest 5 years. What’s left is the highest 35 years.

From there, it’s very simple. Sum up the highest 35 years (in this case it’s $1,720,850)

And divide by 420. (That’s simply the number of months in the highest 35 years)

So while this individual was working, his average indexed monthly earnings was $4,097.

Now that we know the AIME, it’s time to move on to step 3. Step 3 is where the actual PIA (Primary Insurance Amount or full retirement age benefit) is calculated.

To arrive at your PIA, there is a progressive formula. The AIME (from the last step) is applied to the “bend points” to determine how much your Social Security benefit will be at your full retirement age.

The first $856 of AIME is applied to the benefit amount at 90%

In the second range, between $857 and $5,157 is applied to your benefit amount at 32%.

Since we used an AIME of $4,097, there is nothing left to apply in the last range. If there was, it would be applied at 15%.

The sum of these amounts is your PIA or full retirement age benefit. At this point, your benefit is set. But there is still one last step to determine how much you will receive.

The last step that determines your benefit amount is simply the age at which you file

For this conversation it’s important to know what your full retirement age actually is. For those born between 1943 and 1954, you can receive 100% of your PIA at age 66. This age increases up to birth year 1960 where the full retirement age is 67

For the purposes of this video, let’s assume that your full retirement age is 66. If it’s later than that, I’ll show you how to adjust in just a moment.

Only at your full retirement age can you receive 100% of your PIA. If you file earlier, you’ll get less. If you file later, you’ll get an increase.

Here’s the way it works. You can see that at earliest filing age you would only receive 75% of your PIA. If you wait until age 70. You’ll receive a 32% increase!

But what about if you want to file at 68 and 4 months? Good news! The increases (or reductions) are actually calculated on a monthly basis.

For every month after FRA, your benefit will increase by 2/3 of 1% or .667%. For the 36 month period prior to FRA, your benefit will decrease by .555%. For every month beyond that (and there’s only 12) your decrease is slightly lower at .417%.


Step #1) Adjust Earnings for Inflation

Step #2) Calculate AIME

Step #3) Use AIME to get PIA

Step #4) Reduce or Increase Based on Age