Today, I want to show you how to easily calculate your Social Security benefit without a fancy calculator, software or help from someone who doesn’t really care if the information they give you is correct or not (like you may get at the Social Security Administration). With this article, you’ll know how to do this calculation on your own in just a few simple steps.
Why Do I Need To Know How To Calculate My Benefits?
So you may be thinking, “Why do I need to know how to calculate my own Social Security benefits? After all, the SSA will give me an estimate at any time.”
That’s true! You can go to your My SSA account online and see an up-to-date copy of your benefits estimate. So why would you need to know how to do this calculation on your own?
It’s important for a few reasons.
First, it never hurts to understand the mechanics behind an income stream that’ll probably be a large part of your overall retirement income.
Secondly, the SSA makes projections about your future income as part of your benefits estimate.
On the benefits statement they say plainly that they assume your earnings will continue at the same level until your retirement age, and if they are different, your benefit will not match the estimate AND they “can’t provide your actual benefit amount until you apply for benefits.”
This all means that if your earnings are different than their projections, your benefit will not match the estimate.
So, understanding how to do this calculation is especially important if you plan to retire early or later than “normal” or if you have a significant earnings change in the last few years of working.
Only Three Steps To The Calculation
To do this calculation, there are only three steps. Each step has some sub-steps as well.
First, you’ll need to find your Average Indexed Monthly Earnings, or AIME. Then you apply that AIME to the benefit formula and then adjust for filing age.
How To Calculate Your AIME
So let’s jump in with calculating your AIME. To do this, you’ll need to get set up with a tool like Excel, Google Sheets or just a notepad.
You’re going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.
The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says “view earnings record.” If you don’t have an online account, it’s very easy to set one up.
This may seem a little redundant to put the year and your age, but it’ll make another step a little easier.
Now you just need to copy down the information from the SS earnings history. You’ll want to use the part that says “your taxed Social Security earnings.” Don’t skip a year, even if there were no earnings. Just put a zero in.
Once you have all of your historical earnings recorded, it’s time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.
Important note here…only your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.
Also…When you’re getting your indexing factors, you have to be careful to use the factors specific to your age. The easy way to get these is to visit the SSA web page on indexing factors.
At the bottom there is a box where you’ll put the year you turn 62. I know I said your earnings at 60 and beyond are not inflated, but their system is designed to give you your factors based on your age of first eligibility. So be sure to put the year you attain age 62 in this box. When you do, you’ll get indexing factors that you’ll need in the next step.
You’ll notice that the factor is 1 for the years you are 60 and 61.
Now that you have your indexing factors, just copy them on to the sheet. Be sure to keep your years matched up.
Once you have your indexing factors written down, you simply need to multiply your actual earnings by your indexing factor. This will give you your indexed earnings.
Now, all you have to do is extract the highest 35 years of indexed earnings.
NOTE: If you don’t have 35 years, and don’t plan to continue working, you’ll have to use zeros.
If you’re still working and don’t have 35 years, you’ll need to estimate what your future earnings will be and apply the indexing factors just as you would for actual historical earnings. This is where you can start to play around with the numbers to see the various impacts of retiring early, or working later or maybe having variable earnings close to retirement.
Your Highest Earnings
Once you have your highest 35 years in the last column, you just need to sum them up and divide by 420. You divide by 420 because that’s the number of months in 35 years and we need to get your average earnings expressed as a monthly number.
Once you do this, congratulations…you have your AIME and have finished the first (and hardest) step of the calculation. It’s downhill from here.
To keep walking through this example, I’ve assumed a certain amount of wages and years of work. When I do that calculation I get an AIME of $5,726.02. Yours will be different! This was simply the result of my example calculation and I needed an example to continue explaining this calculation.
NOTE: If you die before accumulating 35 years of earnings, there is an alternate calculation. See my article “If You Die Early: How To Calculate Social Security Survivor’s Benefits.”
Time To Apply The Formula
Now that you have your AIME, it’s time to run it through the formula to see what your full retirement age benefit amount will be.
IMPORTANT NOTE HERE: This formula is calculated in the year you turn 62. That’s important because this formula is made up of two numbers that’s often referred to as bend points. These numbers change EVERY YEAR AND YOU HAVE TO USE THE BEND POINTS FOR THE YEAR YOU TURN 62 TO GET AN ACCURATE RESULT.
Let me show you a 2019 example and then I’ll talk you through how to get these for yourself if you don’t happen to be exactly 62 in 2019.
In 2019, the bend points are $926 and $5,583. But the formula is calculated based on three separate percentages of different portions.
First you have the amount up to $926, then the amount between $926 and $5,583 and then the amount over $5,583. Three separate portions, but only two numbers.
Then you take your average indexed monthly earnings and apply it to the grid. Using the AIME number from my example, the first $926 would be used at 90%. The amount from $927 to $5,583 would be used at 32%. Anything over $5,583 would be used at 15%.
Once I’ve ran my AIME through that grid, I simply sum up the far right column and the result is my full retirement age benefit also known as my PIA or primary insurance amount.
But what happens if you aren’t 62 yet? In that case you’ll have to forecast what bend points will be in the year you turn 62.
Thankfully…it’s not that hard because I have a calculator on my website.
The first thing you’ll want to enter is your year of birth. This will do the math for you to figure out how many years until you turn 62.
Then you need to put in the current year bend points. I’ve left this field unpopulated since they change every year.
To get the current year numbers, just click on the link for the SSA page that has these numbers. Just be sure to use the bend points for the PIA formula and not the family benefit formula.
Once you have the current bendpoints plugged in you need to decide how much inflation will occur. In my calculator you can choose 2, 3 or 4%. The Social Security trustees believe the average wage index will increase at around 4% per year, and this index is what controls the bend points, but you may choose to believe that’s too optimistic and want to use a lower number. This is completely up to you.
Once you hit calculate, you’ll see the future bendpoints below. This is what you would use in your formula. Keep in mind that the bendpoints change every year, but the percentages stay the same.
One other thing…if you are beyond age 62 you can find the bend points for the year where you were 62 at that same link.
Now that you’ve calculated your average index monthly earnings and applied them to the PIA formula, you simply need to figure out how your filing age will impact your benefit amount.
Discovering Your Filing Age
The easy way to look at it is to think about it in annual numbers.
Your benefit will be lower if you file at 62 and higher if you file at 70. But there are three separate bands with different adjustment amounts.
The red line is your full retirement age. This is where you receive the amount of the benefit you calculated plus any cost of living adjustments that happen between now and then.
If you file after your full retirement age, your benefit will increase by 8% per year. If you file in the 3 year window immediately prior to your full retirement age your benefit will decrease by 6.66% per year of early filing. For anything more than 3 years before your full retirement age, your benefit will decrease by an additional 5%.
A lot of people don’t want to retire on their birthday so it’s important to break this down by a monthly amount.
Monthly Increase/Decrease Percentages
After your FRA, your benefit will be increased by .667% per month you delay. For the 36 month period before full retirement age your benefit is reduced by .556% and for more than 36 months it is reduced by .417% per month.
And that is it!
It’s your retirement!
Before we go I want to thank you for taking the time to get informed. So many people just float into retirement hoping everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!
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