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A Step-by-Step Guide to Calculating Your Social Security Benefits
When planning for retirement, many people anticipate receiving Social Security benefits. However, the amount you will receive is determined by a specific formula that not everyone fully understands. By breaking down the process and understanding the steps involved, you can get a clearer picture of your potential benefits.
Let’s walk through this step-by-step process to help you estimate your Social Security benefits.
The Social Security benefits formula is a method used by the government to calculate your Primary Insurance Amount (PIA). The PIA represents the benefit amount you would receive if you claim your Social Security at full retirement age (FRA), which is 67 for those born in 1960 or later.
Before applying the benefits formula, your Average Indexed Monthly Earnings (AIME) must be determined. This figure represents your average monthly earnings over your 35 highest-earning years, adjusted for inflation. Once the AIME is established, it is used to determine your PIA using the formula that was in place when you turned 62.
However, your monthly benefit may differ from your PIA, depending on when you choose to start receiving Social Security. Claiming benefits early (starting at age 62) results in smaller payments, while delaying benefits until as late as age 70 can increase the size of your monthly checks.
For individuals born in 1961, the Social Security benefits formula for 2023 is as follows:
Multiply the first $1,174 of your AIME by 90%.
Multiply any amount between $1,174 and $7,078 by 32%.
Multiply any amount above $7,078 by 15%.
Add the results and round the total down to the nearest $0.10.
For example, if your AIME is $3,000, the calculation would look like this:
90% of the first $1,174 equals $1,056.60.
32% of the next $1,826 ($3,000 - $1,174) equals $584.32.
Since your AIME does not exceed $7,078, the amount over that is $0.
Adding these together gives you $1,640.92, which is your estimated PIA.
Step-by-Step Process for Estimating Your Benefits
1. Review Your Earnings History
The first step is to gather your earnings data. The government tracks your wages in an earnings record, which you can access by creating a "my Social Security" account.
Typically, the amount you’ve earned and the amount you’ve paid Social Security taxes on will match, but this is not always the case for higher earners. For example, in 2024, Social Security taxes are only applied to earnings up to $168,600, slightly more than the 2023 limit of $160,200.
2. Adjust Your Wages for Inflation
Next, the government uses the Average Wage Index (AWI) to adjust your earnings for inflation. The AWI in effect when you turn 60 serves as the benchmark. You can view historical AWI figures on the Social Security Administration's website.
To adjust your wages, divide the AWI for the year you turned 60 by the AWI for the year you earned the wages in question. Multiply your earnings for that year by the result to get your inflation-adjusted wages.
For example, if you turned 60 in 2022, you'd use the AWI of $63,795.13 for that year. If you earned $50,000 in 2015, you would adjust it by multiplying your earnings by an index factor of 1.326 (derived by dividing $63,795.13 by the 2015 AWI of $48,098.63), resulting in inflation-adjusted wages of $66,300.
3. Calculate Your Average Indexed Monthly Earnings (AIME)
Once you’ve adjusted your wages, total the earnings from your 35 highest-earning years. If you worked fewer than 35 years, the missing years will be recorded as zeros. Then, divide the total by 420 (the number of months in 35 years) to determine your AIME.
After determining your AIME, apply the formula from the year you turned 62 to calculate your PIA. As mentioned earlier, this formula involves three percentages applied to different portions of your AIME.
5. Adjust Your PIA Based on Claiming Age
Your final monthly benefit may differ depending on when you decide to start receiving Social Security. If you claim before your FRA, your benefit will be reduced. For every month you claim early (up to 36 months before FRA), your benefits decrease by 5/9 of 1%. If you claim more than 36 months early, the reduction increases to 5/12 of 1% per month.
For example, if your FRA is 66 and you claim at 62, your benefits would be reduced by 20% for the first 36 months and an additional 5% for the next 12 months, resulting in a total reduction of 25%.
On the other hand, delaying benefits beyond your FRA increases your monthly payment by 2/3 of 1% per month, up to age 70.
6. Account for Medicare Part B Premiums
If you are enrolled in Medicare, your Part B premiums will be automatically deducted from your Social Security check. In 2024, the standard Part B premium is set to increase to $174.70 per month, up from $164.90 in 2023. This deduction will affect your final take-home benefit.
7. Round Down Your Benefit
Finally, once you've completed all calculations, round your benefit down to the nearest dollar. For instance, if your final amount is $1,680.99, you would receive $1,680 as your monthly benefit.
The Role of Cost-of-Living Adjustments (COLAs)
Each year, Social Security benefits are adjusted to keep up with inflation through Cost-of-Living Adjustments (COLAs). This adjustment is applied to your PIA, not directly to your take-home check. For example, the 2024 COLA is 3.2%, so you would multiply your 2023 PIA by 1.032 to get your new PIA for 2024.
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