The Social Security Administration uses an earnings record to calculate your social security benefits. This earnings record is also called a work record and it spans the length of your professional life and all the income you’ve accumulated. The SSA then uses three steps to calculate your benefits.

Step one: Your earnings are adjusted for historical changes in U.S. wages. 35 of your best-paid years are used to produce your average indexed monthly earnings (AIME). Income that hits the maximum taxable amount is counted after considering the annually adjusted cap on how much of your earnings are subject to social security taxes. In 2021, the maximum taxable earnings are capped at $142,800.

 Step two: Now that your monthly average income has been determined, Social Security applies a special formula to calculate your primary insurance amount (PIA). This is the amount you will receive every month if you wait until full retirement age to claim benefits. Social security arrives at the PIA by calculating the following: 90 percent of the first $996 of your AIME; 32 percent of any amount over $996 up to $6.002; and 15 percent of any amount over $6.002. The sliding scale helps low-wage earners earn the retirement money they need.

Step three: Social Security accounts for the age at which you claim benefits. If you are younger than full retirement age, they take a cut from your benefits. Even if you start Social Security at 62, which is the earliest possible age, you could lose a quarter of your benefits. However, for each month you continue to work and delay benefits, you stand to gain about 30 percent extra.

There are a few things to keep in mind while deciding to apply for social security benefits. First, Social Security recalculates your benefit annually and adjusts for inflation. Second, if your previous year’s income meets the requirements of the top 35 earning years, they will do away with a lower-earning year. Third, if you’ve worked fewer than 35 years, Social Security credits you with no earnings for each year up to 35.

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