Social Security Administration

How Are Social Security Benefits Calculated?

September 17, 2020 By Kathryn Vercillo Leave a Comment

You’re going to retire in the relatively near future. You intend to get some or all of your retirement income through social security benefits. How will that work? Many people aren’t quite sure how the Social Security Administration calculates their benefits. If you don’t understand that, then you might not know how much post-retirement income you can expect. And without that information, it’s very hard to plan for the future.

How Social Security Benefits Are Calculated

The Social Security Administration explains that they calculate social security benefits by taking the following into consideration:

The amount of money that you have earned in your lifetime from employment.
They adjust this amount to consider how average wages of changed over the years.
They base the adjustment on the 35 years you earned the most money during your lifetime.

Then it says, “we apply a formula to these earnings and arrive at your basic benefit” amount.

While the words sound straightforward, this is all a little bit confusing. After all, you probably don’t know how to adjust your wages for changes in wage rates across thirty-five years of employment. Moreover, this tells us nothing about the “formula” they apply.

Digging Deeper Into These Calculations

In order to better understand, we need to dig deeper. The Social Security Administration publishes an Annual Statistical Supplement that includes an appendix that provides us with more information about how social security benefits are calculated. The 2019 version explains that a basic calculation:

Assumes that you didn’t take any disability time during your working years. Further assumes that you didn’t work after becoming eligible for retirement.
They use “wage indexing” to calculate your lifetime earnings. This is how they figure out what you earned, adapting decades-old wages to modern standards of living. They base the adjusted amount on the year that you turn 60. For example, as of 2017, someone who earned $20000 in 1990 would have that count as over $47,000 towards their lifetime earnings based on the “wage indexing” math. You can see further examples of Wage Indexing math on this page.
Now about that “formula” – this is a weight of giving weight to “provide a higher replacement of earnings for lower-wage workers” in retirement. The SSA says that “the formula for persons aged 62 in 2019 is 90 percent of the first $926 of AIME; plus 32 percent of the next $4,657; plus 15 percent of the AIME over $5,583.”

So, as we dig deeper, we see that social security benefits are calculated based on what you earned (at today’s current value for those earnings) for the 35 highest-paid years of your career. This number is then adjusted with that “formula.”

What Can Change These Basic Social Security Benefits?

However, additional things can increase or decrease your basic benefits. Varied factors include:

Early retirement; if you retire at age 62, you can still get benefits but they’ll be lower than if you wait to retire until age 65
Late retirement; if you retire later than 65, you’ll typically increase the amount of benefits you can receive
Continuing to earn money after age 61 but still retiring at 65
Long periods of not working during your working years
Cost-of-living adjustments for the years after you’ve turned 65
Military service, pensions, railroad work and other factors that impact the Social Security tax you’ve paid

This is complicated stuff. No wonder many people aren’t sure how social security benefits are calculated! There is a worksheet here that can help you calculate all of this.

Get an Estimate of Your Social Security Benefits

The link above will take you to a worksheet that you can print out and fill in yourself. It should provide you with an accurate representation of what you can expect to earn in social security benefits. However, if that’s too much work for you at the moment, you might instead wish to use the Social Security Administration’s Retirement Estimator.

This is not going to give you the exact number. It fails to take into consideration many of the more complex details about how social security benefits are calculated. That said, it can give you a good starting point to guess what you are likely to earn in social security income. To keep things even simpler, although perhaps not quite as good of an estimate, the SSA also offers a Quick Calculator.

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What Women Need to Know About Social Security

May 15, 2018 By Tamila McDonald Leave a Comment

Around 63 million Americans currently receive money from Social Security. Some of it goes to retirees and their dependents, another chunk to disabled workers and their families, and a final portion to widows and survivors of the deceased.

Social Security can feel like a complex system, and many women have questions about how it works.

While benefits are a reflection of each person’s unique situation, here are the answers to some common questions that arise for women.

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When Am I Eligible for Benefits?

Precisely when you become eligible depends on your circumstances. As a member of the workforce, you can access Social Security after paying the tax for at least 10 years (or 40 quarters) and reaching retirement age, which is at least 62.

If you’re claiming Social Security as a current or divorced spouse, then you also need to be of retirement age.

For those who are divorced, then you need to have been married to your former spouse for at least 10 years and also be currently unmarried.

Additionally, your spousal benefits are only available if your spouse has filed for their benefit.

Widows, including divorced widows, have to be at least 60 and can’t have remarried.

For Social Security disability payments, you need be considered disabled.

According to the Social Security Administration, this means having a condition that limits your ability to participate in gainful activities, such as work.

The condition must have the potential to result in death or have the ability to last for at least 12 months continuously, impairing your ability to take part in gainful activities for the duration.

Can I Receive More Than One Benefit If I Qualify?

No. People can only receive one benefit. If you are eligible for more than one, you’ll receive whichever comes with a higher payment.

What Will I Receive If I Delay Retirement?

If you wait past your full retirement age, your benefit goes up. Precisely when and how much varies depending on your birth year, so it’s wise to check this Social Security Administration chart to see how much you’ll receive.

What Will I Receive If I Retire Early?

Early retirement means your benefit will be less than if you wait until full retirement age. It goes down by 5/9 of one percent for every month before you reach full retirement age.

For instance, if you retire at 62 when your full retirement age is 67, that’s 60 months early. This means a reduction of 30 percent.

How Much Will I Receive?

Benefits vary from one individual to the next. To see how much you may receive, use the Social Security Benefits Planner Calculator.

How Long Will I Receive Payments?

You’ll receive Social Security benefits for as long as you live. Additionally, it automatically adjusts according to inflation, so your payments usually rise over time.

Do I Pay Taxes on Social Security?

That depends: If you receive other income, including wages, interest, or dividends, then you’ll likely need to pay taxes on a portion of your Social Security.

For example, if you file as an “individual” with a combined income between $25,000 and $34,000, up to half of your benefits will be subject to tax. If you earn over $34,000, then you may need to pay taxes on up to 85 percent.

You can examine whether you’ll need to pay income taxes using the Social Security Benefits Planner.

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Seniors Are Racking Up Excessive Debt

May 14, 2018 By Jeff Hoyt Leave a Comment

You’ve saved for retirement and built up a sizable nest egg. However, you forgot to consider one factor – excessive debt as you approach retirement.

Too many seniors are facing that grim scenario. According to the Employee Benefit Research Institute (EBRI), the share of families age 75 and above with debt shot up from 31.2 percent in 2007 to almost half in 2016. The average debt of these households is $36,757.

The pre-retirement crowd isn’t faring any better. According to EBRI, 77 percent of families with heads of household aged 55-64 are carrying debt.

Increasing Fastest Among Oldest

However, the percentage of debtors is increasing most rapidly among seniors aged 75 and above.

Where’s the debt coming from? Traditional sources like mortgages and credit card debt are increasing among seniors.

Approximately 42% of families aged 65-74 and 26% of families aged 75 or above had credit card debt as of 2016 – the highest percentages ever in the EBRI data from 1992 to 2016.

Student Loans Among Elderly

Surprisingly, student loan debt has increased rapidly among seniors. According to the Consumer Financial Protection Bureau (CFPB), the number of student loan debtors age 60 and above quadrupled from 2005 to 2015 and the average outstanding balance almost doubled to $23,500.

What can you do to reduce your debt? There’s no easy answer, but it all starts with your budget. The only way to pay down debt is to have a monthly surplus to apply to that debt.

Review your spending and expenses with retirement in mind. AARP offers a worksheet that helps seniors evaluate their budget and look for ways to save. Medicare.gov offers similar guidance for health care and drug costs.

Look for Income

Consider income opportunities as well. Do you have skills or hobbies that can be turned into income? Do you have unused assets to sell?

In addition, check with the Social Security Administration to make sure your benefits are correctly calculated. An error in your work record could significantly decrease your benefits.

Once you have a surplus, attack high interest rate debt first (typically credit card debt). Try to limit your credit card debt to auto-payments that cover your basic needs – keeping the credit card debt from growing.

Balance Transfers

Consider taking advantage of a balance transfer card that offers 0% interest for an introductory period.

You can pay down debt without incurring new interest charges – but this strategy only works if you have credit card spending under control.

Otherwise, after the introductory period you’ll still have debt – and likely a higher interest rate.

Repay Debts

If student loan debt is a primary burden, investigate your options for alternative payment programs through the Department of Education.

Income-based repayment options and other programs may allow you to at least reduce your monthly payment and attack other higher-interest debts.

Consider refinancing options or downsizing to deal with excessive mortgage debt – but seek professional help to make sure your refinancing or downsizing costs don’t end up exceeding the savings that you realize.

Re-Evaluate Your Goals

Finally, re-evaluate your retirement goals, taking debt into account. If you need to scale back your plans, do it early. As you evaluate new options, you may find alternatives that are better as well as less expensive.

Take steps to reduce debt as much as possible before reaching your retirement years, while you have more options – but if you’ve already reached retirement, don’t fret about things you should have done years ago.

Use the above tips as best you can and enjoy your retirement years. You made it through other hard times just to get to retirement, and you’ll make it through your retirement years as well.

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