How Social Security Benefits are Calculated

October 31st, 2012  |  Published in Social Security  |  2 Comments

In order to start preparing for your retirement, it is necessary to calculate social security benefits. This will help you to get a clear idea of how much money you will be receiving each month. You can plan ahead and create a budget based on what your income will be.

Social Security benefits are calculated according to several factors. First, the money that you previously earned is restated to reflect the wages of today. Next, your earnings that were highest for 35 years get averaged and divided by 12. This will give the number termed the Average Indexed Monthly Earnings, also known as AIME.

The third and final step of the calculation is that the Social Security benefit formula will be applied to the AIME, producing the Primary Insurance Amount, also known as the PIA. This number  is the benefit that is paid at Full Retirement Age. This will then be the monthly amount that you can expect to receive.

It is important to note that each individual should have worked for at least 35 years at the time of retirement. If this is not the case, it would be wise to consider working until that number has been reached. If not, zeros are added into the calculation for years less than 35.

The final number is going to be lower if you have not met the 35 years of work. This makes it worth it for many people who can reach the requirement to continue working. If you do plan to continue working, the estimated number that you come up with at this time will likely be different from the actual amount.

A person’s Full Retirement Age varies based on the year of their birth. There are many factors that play into an individuals decision to start collecting benefits early. It may be a good choice for someone who is in poor health, or is unable to find work and needs the income to pay bills and living expenses.

It is very important to consider when you will start collecting benefits. Each person has their own unique situation to consider. You can calculate social security benefits at any time, but the most accurate number will be achieved closer to retirement.

  

Responses

  1. Dividend Growth Investor says:

    December 11th, 2012 at 11:28 pm (#)

    I obtained my social security statement, and based off of it, I determined that the highest 10 years of wages produce the majority of my my estimated benefits. It thus seems that one only needs to work for ten years, and then reach 62 years before they can start collecting social security. Am I wrong?

  2. Andy Hough says:

    December 14th, 2012 at 4:05 pm (#)

    You are correct that you only need to work 10 years and reach 62 years of age to start collecting Social Security. The drawback would be that since your benefits are based on your highest 35 years of earnings you would have lots of years of $0 earnings which would result in a fairly small benefit.