Your Social Security Benefits: A Simple Formula

Simple calculation

You’ve probably noticed that your Social Security benefits statement has a section with estimated benefit amounts, but have you ever wondered how it’s calculated? I think it’s important to know and I’m going to show you how. 

A clear understanding of how Social Security benefits are impacted by filing early – or for filing later – is crucial when building a retirement income plan.

Full retirement age?

A critical part of understanding the calculation is identifying your full retirement age.  It’s pretty simple.

For those born between 1943 and 1954, the full retirement age is 66 years old.  If you were born between 1955 and 1960 your full retirement age will be age 66 plus 2 months for every year after 1954. Born in 1961 or later?  Your full retirement age is 67.

Why are all those numbers important?  Your full retirement age is when you are entitled to 100% of your “primary insurance amount” or better known as your full retirement age benefit.   If you file then, you will receive a benefit based on your earning history only.  If you file earlier, it will be reduced.  If you file later, it will be increased.

How to get more (or less)

Let’s examine the increase first.  If you wait to file, you’ll receive a credit of 8% for every year you delay up until age 70.  The Social Security Administration refers to these increases as “delayed retirement credits.”

On the other side, if you file early, your full retirement age benefit will be reduced.  How much it’s reduced all depends on your age when you file.  If you file at 65-one year early-your benefit will be reduced by almost 7%.  Those reductions continue to age 62.  At this point your benefit would be at least 25% lower than what you would receive at your full retirement age.

That’s a nice simplistic view of reductions for filing early and credit for filing later, but what about if you plan to file at 67 years and 8 months?  How do the credits – or reductions – break down on a monthly basis?

There are three separate calculation bands used to determine how much your benefit will increase or decrease on a monthly basis.  This calculation can be used no matter what your full retirement age may be.

  • .667% Monthly Increase – Every month after full retirement age
  • .555% Monthly Decrease – During the 36 month period prior to full retirement age
  • .417% Monthly Decrease – Greater than 36th months prior to full retirement age

That may all sound really technical, but now you can calculate your benefit amount with confidence.  Having a solid grasp on these numbers is the foundation of constructing your Social Security filing plan.


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