Social Security is an important source of income for retirees. But predicting your future Social Security payments can be challenging.
Your monthly benefits depend on your 35 highest-earning years of wages, indexed for inflation. But the exact calculation is complex. Knowing how your payments are calculated can help you plan for retirement and maximize your benefits.
How long did it take you to earn 40 credits?
As a general rule of thumb, it takes most people about 10 years to earn 40 Social Security credits. Each year you can earn a maximum of four credits, and the minimum number of credits needed for full benefits is 40. However, you don’t need to work consecutively to earn the number of credits required; working part-time over a number of years could get you there. It also doesn’t matter that you have gaps in your employment, as your income is based on a calculation of the average indexed monthly earnings (AIME) of your 35 highest earning years.
To qualify for Social Security, only earned income counts. That means wages and salaries, but also tips and certain other types of compensation such as vacation pay. Unearned income such as investment income, interest and dividends, royalties and rental payments don’t count. Nor do loan repayments, gifts or other amounts that don’t meet the Social Security definition of earnings.
How many years did you work?
Most people who work for wages earn Social Security credits, but self-employed workers, military members, domestic servants, and certain types of volunteer work do not. For 2023, it takes $1,640 in wages to earn one credit and $6,560 for four credits. Once you have earned enough credits, you will receive a monetary determination showing the weekly benefit amount you are entitled to based on your base period earnings.
The Social Security department uses your 35 highest earning years to calculate your average indexed monthly earnings (or AIME). Your benefit is also protected from inflation with annual cost-of-living adjustments.
It’s worth noting that if you decide to claim Social Security benefits before your full retirement age, you’ll reduce the amount of your benefit. However, delaying benefits beyond your FRA will result in higher payments if you have good health and an expected long life expectancy. Those extra payments could make delaying benefits the better choice for you.
How much did you earn?
There is a maximum amount that you can earn in your lifetime and receive in Social Security benefits. This is based on your full retirement age (FRA) in 2022, which is 66 for those born between 1943 and 1954, and gradually increases to 67 for those born later.
Your base Social Security benefit is calculated by a formula that uses computation years, which are always 40, plus dropout years that allow you to drop your lowest-indexed earnings. This is a slightly different calculation for disability benefits, which use a different number of dropout years, but the result is the same.
A common misconception is that you can’t start receiving benefits before age 65, but this is not true. You can voluntarily suspend your benefits until as late as age 70 and still get an annual cost-of-living adjustment, but you’ll receive less per month than if you take them earlier. This is another good reason to make sure you save enough in your 401(k) and other savings accounts.
How do you calculate your Social Security benefit?
There aren’t many times in life when you can take a mulligan, but Social Security provides one. If you start collecting your benefits before your FRA, you’ll receive a reduced amount for the first 36 months that you claim. That’s why it’s generally best to delay your benefits as long as possible.
Social Security calculates your basic benefit, also known as your primary insurance amount (PIA), by tallying up your top earning years and applying some simple arithmetic. This calculation is done with the help of indexing factors that are specific to your age. To get these, log in to your SSA account and navigate to your earnings history.
Once you have your PIA, you can multiply it by 1.5 if you’re married or if you include your spouse’s income in the calculation. To do that, log in to your SSA account and find the worksheets labeled “spousal” or “family.” Then, select your highest 35 earnings years.
