How is Social Security Calculated?

Do you ever find yourself asking, “How is social security calculated?”  No matter your age, you may have a strong interest in this question. However, those who are closing in on retirement definitely need to learn more about how their benefits are calculated.

The Math behind Social Security

Here are three steps used to calculate Social Security benefits:

1. Previous earnings are recalculated in “today’s wages” to reflect growth.

2. Earnings for the highest 35 years are compiled, averaged, and dived by 12. The end result is a number known as Average Indexed Monthly Earnings (AIME).

3. The Social Security benefit formula is used to arrive at another number – the Primary Insurance Amount (PIA). This leads to the benefit to be paid out at full retirement age.

In addition to the three steps above, there are several factors that change the amount of your retirement benefit.

  • You choose to receive benefits before reaching full retirement age. Did you know that you can begin to receive benefits as earlier as age 62? While this is possible, it will result in reduced benefits.
  • You delay retirement past full retirement age. If you wait to receive benefits until after full retirement age you will receive an increased amount depending on your date of birth. In this case, your benefit amount increases until you start to receive money or reach the age of 70.

Do you still have questions regarding how Social Security is calculated? Have you found errors on your Social Security Statement? Feel free to contact the Social Security department. As a United States citizen you deserve the right to receive this benefit in retirement. It is important to have all your questions answered to ensure that you make the right decision while receiving the proper level of benefits.

As you can see, the math behind how Social Security is calculated is not overly difficult.

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  1. Results are dived by 12
    I like that
    Seriously though, do you have a retirement calculator?

    1. Thanks Brian. We do not have a retirement calculator at the moment, but we are looking at more tools to the site in the future. Hope to see you back here again.

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