Several Factors Determine How Your Social Security Benefits Are Calculated

Social Security benefits are calculated using a specific formula based on your date of birth, lifetime earnings and other factors. Here's how you Social Security benefits are calculated.

Jennifer Farrington - Author

Oct. 13 2021, Published 2:58 p.m. ET

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If you’re nearing retirement or approaching an age where Social Security benefits will soon be accessible, you’re probably wondering what your Social Security check is going to look like. Will it be enough for you to survive on, or will you need additional sources of income to help you afford your day-to-day and monthly expenses? To answer these questions, you need to know how Social Security benefits are determined.

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How are social security benefits calculated?

Social Security benefits differ for everyone, as the amount you receive depends on your date of birth, earnings, the age you decide to collect benefits, and the cost-of-living increases you might incur. The Social Security Administration (SSA) will calculate your Social Security benefits using the following formula:

The SSA adjusts your “actual earnings to account for changes in the average wages since the year the earnings were received.” This is referred to as indexing your actual earnings. The SSA uses “the national average wage indexing series to index [your] earnings” to ensure inflation is accounted for.

  • Once your actual earnings are indexed by the SSA, the agency will determine the 35 years for which you earned the most and add these amounts.

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    Your total indexed earnings for those 35 years will then be divided by 420, which is equivalent to the number of months in 35 years. The amount will be “rounded down to the next lowest dollar,” and the amount will reflect your “average indexed monthly earnings (AIME).”

    To get the exact amount you will receive in Social Security benefits, the SSA will need to go through a few more steps.

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    First, the SSA will use your AIME to apply a bend point formula to determine what your primary insurance amount (PIA) will be. Your PIA is the amount you will receive in monthly benefits. Let’s say you reach the age of retirement in 2021; the bend point formula would be applied like this:

    • Multiply 90 percent by the first $996.
    • Multiple 32 percent by any amount over $996 and up to $6,002.
    • Multiply 15 percent by any amount over $6,002.

    The SSA will add all these numbers up to arrive at your PIA. Your birth year will then be used to determine the age at which you can retire and collect 100 percent of your PIA. The SSA updates the bend points annually and publishes this information on their website.

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    How much would someone receive in Social Security benefits if they averaged $55,000 a year and retired in 2021?

    Let’s say after your actual earnings were indexed, you averaged $55,000 a year for 35 years. Your total indexed earnings would equal $1,925,000 and after dividing this by 420, your estimated AIME would be $4,583. Now, you need to apply the bend point formula.

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    When applying the bend point formula, you will multiply 90 percent by $966. This equals $869. The remaining amount, $3,617, is then multiplied by 32 percent, which equals $1,157. Seeing that the AIME is not over $6,002, you will add $869 and $1,157 to determine your monthly benefit amount.

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    At what age can I begin collecting Social Security benefits?

    The earliest you can begin collecting Social Security benefits is age 62. However, if you are disabled or have earned the required work credits prior to this age, benefits may be accessible at an earlier age. If you decide to wait until after you reach your full retirement age to collect benefits, which is age 65, the SSA will increase your monthly benefit amount “up until you reach the age of 70.”


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