Are you close to retirement age and dreaming about the day you can say good-bye to your nine to five job? If so, you may be wondering whether you will get enough money from your Social Security benefits to live the life you have been planning for.
Retirement is an important milestone in every adult’s life, and you should have an idea about how much money you will get each month from your benefits whether you choose to retire at 62, or to wait until your full retirement age.
The Social Security Administration calculates your monthly benefits based on your lifetime earnings. Using that number, they index (adjust) those earnings for external changes like inflation. The number they come up with is called the average indexed monthly earnings. Next, they apply that number to a formula to calculate your primary insurance amount, or your monthly benefit.
It sounds confusing, but you can calculate your approximate benefits in the same way. Here is how you can do it:
How Can You Calculate Your Social Security Benefits?
Before you can begin to calculate the amount of money you will get from your retirement benefits, you need to know if you are eligible for Social Security. Besides being at least 62 years old, you must also have 40 Social Security credits. You earn these credits by working and paying taxes. Every credit represents $1,320.00 of your earned, taxable income. You can earn a maximum of four credits per year.
To find out if you have the necessary minimum of 40 credits, you can check your annual statement from the Social Security Administration (SSA). You may receive this statement in the mail, or you can go to the official SSA site online, create a personal account, and get information about your yearly earnings and your total Social Security credits.
Once you are certain that you are eligible, you must calculate your average indexed monthly earnings (AIME). Social Security comes up with your AIME by looking at your yearly earnings for all your years of employment. They use the sum of the top 35 years of indexed earnings, divide that number by 35 for the annual average, and then they divide that number by 12 for the monthly average. This is your AIME.
For the next step, the SSA finds your primary insurance amount (PIA). PIA equals the sum of the numbers you get by making the following three calculations:
1. 90 percent of the first $895.00 of AIME
2. 32 percent of AIME that is over $895.00 but less than (or equal to) $5,397.00
3. 15 percent of AIME for any amount about $5,397.00
Every year the SSA uses a different formula to calculate PIA. For example, the dollar amounts used in the example above were the formula used in 2018. For a person who was 62 years old in 2018, this was the formula used to determine the PIA.
The PIA is calculated with the formula in effect for the year retirees turn 62. Even if retirees start getting their benefits at 66 years old, the formula for them is that which was in effect when they were 62.
Your PIA is the monthly benefit that you will get at your full retirement age. If you choose to retire before your full retirement age, your benefits are permanently reduced. The percentage of reduction depends on your age at the time of retirement. Age 62 is the youngest that you can begin getting Social Security benefits.
To calculate your monthly benefit if you opt out early, use your PIA and deduct the percentage shown below. These figures are based on full retirement age being 67:
• 30 percent reduction at the age of 62
• 25 percent reduction at the age of 63
• 20 percent reduction at the age of 64
• 13.3 percent reduction at the age of 65
• 6.7 percent reduction at the age of 66
Another factor that plays a role in your monthly benefit amount is the cost of living adjustment (COLA). When you reach full retirement age, any COLAs that were made during the years after your PIA was formulated when you were 62 are added on. This may be a significant amount if the COLAs were substantial.
Figuring out your prospective monthly Social Security benefits alone may not be easy, but you can come up with an approximation. If you want a more accurate number, speak to an agent at your local Social Security Administration office.