How Are Social Security Benefits Calculated? A Few Points And Aspects Having Effect On The Benefits

Among the most popular Social Security questions that I hear from baby boomers getting prepared for retire is "how are Social Security benefits calculated?" This is a vital question since it could affect how long you need to work, whether you should continue to work during your retirement years, or other factors of your retirement plan.

Firstly, please note that you receive a Social Security retirement benefit estimate every year in the mail, generally near your birth date. There're also several calculators available on the Social Security site to help you estimate how much your retirement benefits will be, thus you do not need to know the ways to calculate the benefit yourself.

It is still useful to know how Social Security is calculated, but, so here are the basics:

Generally, your top 35 years of earnings are listed for inflation, then averaged to figure out the basis for your per month benefit. If you worked lower than 35 years, the missing years will be calculated as nothing for purposes of determining your benefit amount.

Planning suggestion: If you have close to 35 years of earnings and you are near to retirement, you'll benefit very much by continuing to work until you've 35 full years of earnings to include in your benefit calculation. Most of the people it'll affect are women who took time off work to raise a family.

The top 35 years of earnings are then divided by 35 to arrive at your average indexed monthly earnings (AIME). A formula is applied to your Average indexed monthly earnings to figure out your primary insurance amount (PIA). We won't go into the details of the formula; the critical thing to notice is that your Primary insurance amount is the full unreduced benefit you would receive if you retired at your full retirement age (age 66 for people born between 1943-1954). This amount will be decreased if you take early retirement or increased if you retire after age 66.

The PIA is also the base for many other benefits like spousal benefits, thus it's vital to understand that your PIA isn't always the same amount that you will receive. If you're married and your spouse will be collecting benefits according to your earnings rather than her own, then you might want to maximize your own PIA to maximize the total Social Security benefits you and your spouse will obtain.

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